In my lifetime, I’ve witnessed five Cubas.
Pre-Revolution, 1952-1958
In the 1950’s, the Cuban people suffered under great oppression from
its military dictator, Fulgencio Batista. The great majority of Cubans
at that time lived in fear and welcomed regime change. That change came
from Fidel Castro and a small band of rebels in 1959. Although the
rebels were poorly armed, poorly trained and were by no means expert
military strategists, they had a distinct advantage: the Cuban people
would get behind
nearly anyone who would oust the tyrannical Batista.
The Soviet Years, 1959-1989
Following the revolution, Mister Castro went to New York and appealed
to the US government to recognize his leadership. Unfortunately, Mister
Batista had been a US Government toady and the Mafia was heavily
invested in Havana hotels and casinos. Mister Castro had destroyed those
cosy relationships and the US was unquestionably not going to give him
its seal of approval.
At that time, Mister Castro was not a communist. In fact, he followed
no particular philosophy of governance whatsoever. He merely sought
power and was open to whatever offers were on the table that might
ensure it.
But he didn’t have to wait long. The USSR realized that Cuba was a
real plum, geographically, and, in trade for Cuba declaring itself to be
communist, the USSR provided considerable military support. The Soviets
also offered to buy Cuba’s main export product – sugar – at three times
the going rate. Cuba then entered into an unsound economic system.
Although it would lose the productivity of the free-market system, the
government would gain the benefits needed by Mister Castro to solidify
his power base. (It’s important to note that, although political
victimisation still existed, it was below what had existed prior
to1959.)
Under the new collectivism, the possession of US dollars was
punishable by up to two years in prison. Foreign exchange stores were
only for foreigners and the politically well-connected. But whenever a
government places a wet blanket on the free-market, a black market
arises
in proportion to the suppression of the free market.
It’s often been assumed that political oppression in the Soviet
period must have been severe, or the people would have overthrown the
government. But this is not so. The reason why Cubans were largely
accepting of the system was that the
black market functioned
well. Bureaucrats embezzled funds under an inefficient system,
state-owned goods were routinely stolen, underground entrepreneurships
flourished and, in general, life was better than it had been prior to
1959. In addition, literacy and healthcare became free to all, a fact
that’s cherished by Cubans to this day.
The “Special Period”, 1990-1999
But, with the collapse of the USSR, all bets were off. The false
economy crashed with a bang. Mister Castro euphemistically declared a
“special period,” in which education and health care would remain as
major priorities, but poverty would become rampant. I can remember that,
in the 1990’s no dogs or cats were seen on the streets of Havana, as
meat was so scarce that a pet in the stewpot was considered a luxury.
Early in this period, a major attempt was made to create an
international tourist market. College professors, doctors and engineers
were pleading for permission to quit their professions to become bus
drivers, tour guides and waiters. At that time, a tour guide or hotel
bartender might comment to me that he’d gain more in tips in one day
than he’d earn in a month from his government-provided salary as a
surgeon or attorney.
But, as much as the government sought to oppress such exchanges, a
new class arose in Cuba. Those who received tips, or ran off-the-books
businesses in tourism, soon were moving into better homes, buying more
and better goods for their families and, most importantly,
growing the economy.
As poverty was otherwise so dire, the “new rich” could now afford
maids, nannies and gardeners – job descriptions that had fallen out of
existence in the Soviet era. The black market, in fact, became the
dominant market and, in effect, an ad hoc free market, as it operated without regulation and by supply and demand - the cornerstones of any free market.
Anyone who embezzled state-owned goods, sold his paintings on the
street, or rolled cigars for tourists was living better than degreed
professionals. So, why then, was this new class not crushed by the
government? Well, the average bureaucrat had the opportunity to provide
permission, look the other way, or divert state-owned goods and himself
become one of the new “rich”. The black market benefitted virtually
everyone.
This brought about a profound change in the Cuban people. The older
generation, who remembered the Batista days, often remained dedicated to
“the revolution,” but younger Cubans were less interested in
revolutionary platitudes and collectivist rhetoric and were more
interested in the new prosperity, no matter how moderate it was by
international standards.
The Recovery, 2000 – 2013
Conditions improved over the decade of the Special Period, but
expanded dramatically when failed Venezuelan revolutionary Hugo Chávez
came to Cuba in 1997. He was treated as a hero on his arrival and was
promoted unceasingly by Mister Castro. In gratitude, when Mister Chávez
became president of Venezuela in 1999, he provided much needed oil and
goods to Cuba and the Cuban economy.
This did not eliminate the black market. It enriched it. Like never
before, the economy expanded and, by the time Fidel Castro handed the
reins of state to his brother Raul, the writing was on the wall. Over
the years, such a large percentage of Cubans were operating
off-the-books businesses that they became the backbone of the economy.
Increasingly, free-market suppression was lifted to allow these
cuentapropistas to operate legally, since, if they were licensed, they
could be taxed, thereby funding the state, which up until this time had
not been getting a cut from the black market.
The Renaissance, 2014-
After the younger Castro took office, more restrictions were lifted and soon, the main legalized
economy was being created by the cuentapropistas – the inventive
restauranteurs, the entrepreneurs who were running their own taxi
companies, and the owners of the casas particulares – private houses
that were offered for rent to tourists.
Today, unlike so many countries in the world, the regulations are
diminishing in Cuba, rather than expanding and the economy is being
driven by a black market that’s in the process of being converted to an
increasingly legal free market.
It should be noted that this was in no way brought about by the
“historical” visit by US President Obama. If anything, his visit was an
attempt to ride the new wave of freedom now being born in Cuba. His
demands of Raul Castro that he “play ball” with the US were rejected
and, as the US continues to decline under oppressive regulation and
indebtedness, Cuba will continue to rise out of its long collectivist
slumber.
The takeaway here is that, whether it be Cuba, Zimbabwe, Argentina or
Venezuela, over-regulation by any government causes a black market to
be spontaneously created by the people of a country. Eventually
, even top government leaders come to rely on the black market, as it works better than an oppressive system and, at some point, the black market becomes legalized and morphs into a free
market. And, in any country, the very life-blood of prosperity is a
free market. No amount of political rhetoric or collectivist ideology
has ever, or will ever change that essential economic fact.
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Jeff Thomas is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government. He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man (http://www.internationalman.com) and Strategic Wealth Preservation in the Cayman Islands.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
