Care about Cuba? Open up its markets

The pre-Christmas announcement by President Obama that the United States would re-establish diplomatic relations with Cuba will reignite a number of debates. One will be about the cause of Cuban poverty over the past 56 years. Some will blame communism; others will cite the American trade embargo. The correct answer is “both.”

For those who need a refresher course in recent Cuban history and the failed economics of communism, let’s start with the former.

Fidel Castro came to power in 1959 in a revolution promising prosperity, democracy and the restoration of Cuba’s 1940 constitution. He instead confiscated private property, nationalized businesses, outlawed free markets and set up a communist autocracy.

Americans, who had both legitimate and crooked (i.e., mafia) investments in Cuba before Castro’s rise were understandably unhappy with Castro’s confiscation of private property on the island. That led to the 1960 American trade embargo on Cuba. Shortly thereafter, in January 1961, then-President Dwight Eisenhower cut diplomatic relations.

The reestablishment of full diplomatic relations between the United States and Cuba does not guarantee an automatic end to the trade embargo. That requires congressional approval, and leaders in the House of Representatives and Senate have made it clear they will resist.

That’s unfortunate. While the original justification for the embargo was sound—confiscation of private property deserved a response—the 55-year old embargo has always given the Cuban government cover for its command-and-control approach to the economy.

Communism, Cuban or otherwise, could never work. That’s because it assumed an ability of governments to direct an economy from the top-down about what citizens value and at what price. Not surprisingly, the attempt by communist states to replace organic, self-organizing decisions of millions of people with guesses from autocrats and bureaucrats led to a shortage of everything from bread to beer to housing.

Ironically, over the decades, Cuban communist leaders complained about embargo on goods and services across an international border while banning free trade (i.e., free markets) at home. The criticism was and is correct but for the same reason communism hampers Cuba: a lack of trade hurts an economy.

That historical irony and double economic whammy meant that Cuba, relatively wealthier than the rest of Latin America at the time of Castro’s Cuban Revolution, has since fallen behind.

In the year before Revolution, in 1958, Cuba had a per capita GDP of $2,363 according to the OECD (all figures Geary-Khamis dollars, i.e., dollars adjusted for purchasing power parity). That was a higher per capita income than the Latin America average of $2,018.

By 2008 though, Cuba’s per capita GDP had risen to just $3,764. Meanwhile, the Latin American average had risen to $4,360 and with some countries—Chile, for example, as high as $13,479 in per person GDP—now three and a half times higher than Cuba.

The absence of a free market at home and injured trade abroad has been costly for the Cuban people. When I visited Cuba seven years ago, much of the city’s housing stock was literally crumbling. Some people lived in the lower floors of apartment buildings where the upper floors had already collapsed. But there was nowhere else to live. It was also common for several families forced to live in apartments and houses designed for just one. Rationing for food, gasoline, and needed pharmaceuticals was also evident.

By design, the Cuban economic system post-Revolution could never provide the goods. And the American trade embargo was also explicitly designed to hamper Cuban economic growth.

Over 56 years, the combination has harmed individual Cubans and their families. Transforming that tragic reality will require a change not only in Washington D.C. but in Havana.