The Blog

A Different Kind of Cuban Revolution

Despite its reputation as a stagnant state-run economy, over the past few years the Cuban government has passed pro-business reforms that have unleashed a flurry of entrepreneurial activity. How and why has this happened, and will Castro Inc. stick to the plan?

Despite its reputation as a stagnant state-run economy, over the past few years the Cuban government has passed pro-business reforms that have unleashed a flurry of entrepreneurial activity. How and why has this happened, and will Castro Inc. stick to the plan?

I recently spent several weeks in Cuba, a contradictory, mysterious, beautiful and above all utterly fascinating country. And while the last thing I expected to come out of my trip was an article on the vibrant entrepreneurialism in one of the world's last remaining communist strongholds, that is exactly what I encountered. For although the Cuban Communist Party (CCP) still maintains a tight grip over the means of production (by tightly planning production and distribution, employing the majority of the population and monopolising participation in foreign trade), a new generation of small businesses and the self-employed are springing up to challenge the state's hold over the economy.

As I travelled throughout the island, instead of the drab and uninspired state-run hotels and restaurants I had been warned about, I came across locally run casas particulares (rooms or houses rented out privately by Cubans) and paladares (private restaurants, often hosted in locals' homes). And while I soon became familiar with the sight of under stocked government shops lethargically serving queues of locals in the sweltering 35-degree heat, it was just as easy to spot entrepreneurs hawking everything from fresh produce and handmade goods to haircuts, manicures and (in a country with highly limited internet access) access codes to Cuba's 65 precious Wi-Fi hotspots. Locals and informed travellers I spoke to repeatedly emphasised how new this all is; just a few years ago, bed and breakfasts in Cuba were prohibited from marketing themselves with street signage, while private restaurants numbered in the single-digits instead of the hundreds that now exist in cities such as Havana, Trinidad and Santa Clara. I even managed to book all of my accommodation using Airbnb, a minor miracle in a country where only around 1% of the population has daily Internet access.

This growth in Cuba's entrepreneurial sector has not come about by chance. In an economy as regulated and centrally planned as Cuba's, no such change can take place without approval from the "compañeros" at the top. This approval finally arrived in 2011, when major reforms legalised and expanded the role of small businesses in the Cuban economy, a sharp turn away from decades of private sector disdain and suppression. Small business was abolished in Cuba a few years into the Revolution, when Fidel Castro labelled private business people a "class of parasites...who prosper from the work of others". From that point onwards, the state took control of the island's entire economy, abolishing private property and private exchange and determining what was to be produced and who was to be employed.

While undoubtedly inefficient, Castro's regime was kept afloat by the Soviet Union's generous economic support. This financial assistance dried up upon the Union's collapse in 1991, leading to an extremely severe period of austerity and economic contraction known in Cuba as the "Special Period". Limited pro-business reforms were passed as a matter of desperation, but soon retracted when Chavez's Venezuela stepped in to take up the Soviet mantle. With Venezuela now in the midst of a severe economic crisis, the latest economic reforms - which go much further than their 1993 predecessors - appear to be an attempt to kick-start the stagnating Cuban economy by unleashing the power of private enterprise.

Instigated under the leadership of Raul Castro, who has proved a more pragmatic ruler than his older brother Fidel, the recent legislation authorises self-employment in several hundred professions, permits self-employed Cubans to take on employees, and opens the door to trade between the state sector and small businesses. It allows for the private exchange of cars and homes, and has begun easing the tax burden on entrepreneurs. Combined, the reforms have led to an explosion in the number of self-employed Cubans, from 148,000 in 2009 to 500,000 in late 2015, although some economists estimate that the figure could be as high as two million (around a fifth of the population).

While these supply-side measures deserve much of the credit for Cuba's on-going entrepreneurial revival, it would not be possible without the growing influx of visitors (myself included) that has been arriving at its shores. No longer able to sell its sugar (historically Cuba's most lucrative export) at favourable rates to the Communist Bloc, Cuba's government has opted to expand the role of tourism in the economy. It has been rewarded by large numbers of them from Europe and Canada (and increasingly, the United States) drawn to the island's natural beauty, history, unusual political and social system, and the time-warp effect created by an abundance of Spanish colonial architecture and colourful 1950's American cars. Taxi-drivers, traveling musicians, street pedlars and owners of casas, paladares and various other small businesses rely on tourist spending to supplement measly state incomes of between $20 to $30 a month - "nowhere near enough to live on" as one particularly frank taxi-driver put it to me.

If I might go so far as to describe these changes as the latest "Cuban Revolution", how should the Revolution go about consolidating itself, as all revolutions attempt to do? First of all, the Party needs to stick to the reforms it has begun implementing and work hard at convincing both Cubans and non-Cubans (visitors, entrepreneurs and investors) that it is committed to them for the long run. As mentioned, the government has a record of backtracking on its reforms, as in the 1990s when - after facilitating a boom in self-employment - it stopped renewing licenses for small businesses and retreated from its mildly positive pro-entrepreneur rhetoric. Fortunately, given the far greater depth of the changes this time around, a repeat looks less likely.

Secondly, the policy changes should not stop with the 2011 reforms but should continue as the private sector in Cuba develops. The legal recognition granted to small businesses (as opposed to self-employed workers, who already possessed it) in May 2016 will make it easier for the government to support them directly with favourable legislation, regulation and international trade permits. But if the Party is really serious about stimulating entrepreneurship, it will need to give private businesses more of a voice in the formation of economic policy. While full democracy might be a long way off in Cuba, that would be a good start.