The fire at the Matanzas Supertanker Base, the ongoing electricity supply crisis all across the island, the precipitous drop in sugar production, the endless lines to acquire increasingly scarce food, the continuous decline in the value of the Cuban peso, and the depletion of international financial reserves join the long list of economic setbacks that Cuba has been suffering since 1959. Thus, it is opportune to re-examine once again the country's economy from a broad perspective, both historically and internationally. To this end, I will be drawing on John Devereux's latest research on the Cuban economy, based on historical statistics that include, along with other sources, the Maddison Project at the University of Groningen in the Netherlands. Devereux is a professor of Economics at Queens College at the City University of New York.
According to his analysis, the Cuban economy grew and improved Cubans' standard of living after of the founding of the Republic in 1902, rising to rank, in per capita terms, 17th in the world in 1955. As the researcher points out, Cuba actually became the first tropical country to graduate from underdeveloped status and become a medium-growth country. However, after 1959 the Cuban economy rapidly deteriorated, tumbling to 90th place by 2018. Devereux describes this drop as an exceptional case in international economic history of the last century, as only Syria and North Korea match Cuba in the huge declines of their economies during this period.
How can it be explained that Cuba has become a poor country after enjoying a position of relative prosperity in the world, despite the promises of development by the leaders of the 1959 Revolution? What specific factors led to such a dramatic implosion of the Cuban economy? The causes of this phenomenon are many and are related to the loss of economic freedom that Cuba has suffered since 1959, accelerating in 1960 with the massive expropriations of foreign companies and large national ones, and culminating in 1968, when Fidel Castro prohibited all forms of private economic activity. The Heritage Foundation's economic freedom index for the year 2022, which includes 177 countries, lists Cuba in 175th place, with only North Korea and Venezuela enjoying less economic freedom.
Until 1959 the Cuban economy had operated without being run by any central government or power, but rather shaped by a vast array of millions of decisionmakers operating freely as consumers, workers, professionals, merchants, businesspeople, bankers, agricultural laborers, owners and investors. This variety of occupations was the result of a society characterized by a high degree of freedom of choice for all citizens. Acting to meet their personal needs according to the resources at their disposal, together Cubans shaped the national economy through millions of daily decisions and transactions, usually within the rules of the market and the law. Until then, the Cuban economy illustrated the effects of Adam Smith's metaphorical "invisible hand," which seemed to guide the entire economy towards its citizens' personal satisfaction, as Cubans were the owners of their economy.
It was thanks to wide-ranging economic freedoms that Cubans' average standard of living was among the highest in Latin America, and on a par with several European countries, at the end of that decade. Levels of production, variety and the quality of goods and services —available in any quantity that Cubans preferred and bought freely with their earnings— were determined by many thousands of industrial, agricultural and commercial enterprises of all sizes spread throughout the country.
The economy then was the work of thousands of private hands, the Cuban State not intervening in the management of their transactions, though it did serve as an agent coordinating sugar production and export. The financial sector and numerous accounting and professional and legal services companies played roles supporting the country's productive and distributive apparatus through their multiple interconnections with the rest of society and their economic and financial activity. As an open economy, Cuba traded freely with the rest of the world through a freely convertible currency. It was not a perfect economy; there was room for improvement, but it prospered, and was far, far superior to what exists today.
When one observes the infinite connections between the diversity of companies and citizens, their great variety of contractual relationships and corresponding supply chains, one realizes how their complexity resembles that of a neural network, like those operating in the nervous systems of living beings. Through this network of highly complex, invisible and indescribable connections, which developed during centuries of economic and social development, billions of daily transactions were carried out freely, from the simple purchase of an orange from a street vendor, to the design and construction of an apartment building for housing, an industrial warehouse or a large engineering project.
Such transactions also included the recruitment of staff, the acquisition of property, and applications for and the processing of loans all kinds of financial and economic support activities. As a whole, the network of connections transmitted signals that controlled the economy under principles that today could be conceptualized as a highly efficient cybersystem.
It is very easy to damage these connections, as has been demonstrated since 1960, but it is very expensive and difficult, if not impossible, to rebuild them. It was through this network and the interactions between supply and demand that the prices of each of the goods and services that were produced and distributed, without State intervention, were determined, and workers' wages, and revenues attributable to capital, were established in the same way.
The 1960 expropriations, which later continued with smaller companies, not only rescinded the right to private ownership of the means of production, but also limited and eliminated the freedom to trade in goods and services of all kinds. The economy's neural network suffered severe damage, as catastrophic as those suffered when the circuits of an electronic system are cut, or the neurons and dendrites of a nervous system are destroyed.
The fallout from the expropriations
It is important to appreciate that the expropriations in Cuba entailed much more than a simple shift in the owners of the assets and properties affected. With the disappearance of private property rights, the management, control and administration of the companies concerned was transferred to State organizations, through improvised "consolidated companies" at various ministries, depending on the sector of economic activity in question. In this process, competition between individual companies disappeared and consolidated companies became true monopolies, with the State as the sole owner, setting prices and wages within the parameters of the central Government, which sought, futilely, to operate with the same efficiency and profitability as when they were private, stripped of the connections that allowed it to operate as before.
Competition between individual firms, in addition to providing incentives to offer better quality and lower prices, had also meant that the market could still meet demand if some firms failed to produce. When one producer was unable to meet demand, competition ensured redundant capacities, and another filled the gap, with consumers not even noticing any shortages. Before 1959, the failure of a given producer was rarely a news item or subject of a political discourse.
In fact, the expropriations would show that those owners had not only been proprietors, but they had also generated relationships of many kinds through their properties, mainly the ability to provide in a stable way what society needed, producing it efficiently at low costs. Typically, owners were responsible for the state of their companies, so they strived for the efficient use of their resources, hired administrators and workers with various qualifications, saw to it that their customers' demands were met, with each taking care to ensure the stability of the supplies that their business needed, and the maintenance, possible expansion and modernization of their establishments. Company personnel were recruited, promoted and compensated on the basis of their skills and competence, not for their political allegiances, as became the case when companies came to be run by the Government and its ministries.
This multiplicity of relationships and interdependencies disappeared in Cuba with the expropriations. The physical replacement of owners by State employees or bureaucracies was not accompanied by the replacement of the same administrative and employment relationships. The mutilation of private property did not automatically transfer to the State the benefits previously generated by the profits that companies produced, usually through competition with other companies in their sectors. On the contrary, companies began to operate incurring losses, forcing the Government to subsidize them. And, as could be seen almost immediately after 1960, the most productive personnel at companies began to resign and to leave the country in search of better working and living conditions abroad, a process that has been repeated in Cuba ever since. Ceasing to be the owners of their economy, Cubans became the prisoners of the government and Fidel Castro himself.
Fidel Castro's central planning and decisions
The en masse expropriations were accompanied in Cuba by the organization of the central planning system typical of Communist societies, to administrate what was called the "socialist economy" (as a step prior to the Utopian and never-realized "Communist economy"). Thus, the Central Planning Board (JUCEPLAN) was founded, together with similar offices at all State agencies.
The companies expropriated all across the country then lost the autonomy and flexibility necessary to adapt to the economy's dynamic conditions, becoming subject to a centralized and very rigid administration unable to meet the demands of buyers in all their complexity and specificity.
This radical change of administration was traumatic for the whole country and all its sectors, triggering a general contraction in production and consumption levels. And the contracting of production was what led to the need for subsidies from the Soviet Union, first, and then Venezuela, to prevent a collapse of the national economy. Without such subsidies, the Cuban economy would have exhibited an even greater decline since 1959 than the one Devereux describes.
In addition to the trauma of forcing Cuba's economy to struggle in the straitjacket of socialist planning, we must add the largely overlooked effects of Fidel Castro's personal interventions in the economy. These interventions were actually capricious and ill-conceived, with no technical foundations or feasibility studies, and formulated outside the central plan, with the ruler dismissing experts' observations and warnings. His interventions not only aggravated the inefficiency of what was already a mediocre central planning system, exported by Russia to Cuba in response to its requests, but also introduced a pernicious class of disorder and chaos into the planning and management system, both at the highest levels of government and at that of the administration of state enterprises.
These interventions consisted of proposals for investment projects, for which resources were allocated outside the plans —resources that had to be extracted from other projects of State agencies and their enterprises—. These projects were frequently imposed on the JUCEPLAN without any prior notice and, in to avoid ever questioning Fidel Castro, were processed and financed as "Special Plans."
The assignation of these projects was also improvised, allocating them to any state agency or group of people that Fidel Castro could think of in each instance, without a prior evaluation of their competencies. The best-known and most costly examples were his failed cattle and pig development plans, the Havana Cordon (agricultural production) fiasco, and the "ten million tons of sugar harvest" debacle, planned for 1970, its losses never disclosed.
It is not possible to exaggerate here the disruption wrought by these decisions and working methods, both administrative and governmental, on the Cuban economy. Though the unbelievable aspects of this phenomenon force us to point it out, a lack of documentation makes us depend for our analysis of the Cuban economy since 1959 on fragmentary, anecdotal and personal evidence —such as the direct experience of this author, who worked for the JUCEPLAN between January 1963 and March 1966.
The "Revolutionary Offensive"
Fidel Castro's most devastating blow to the national economy was dealt on March 13, 1968, during the celebration of the anniversary of the assault on the Presidential Palace in 1957, when he announced a "Revolutionary Offensive," which consisted of the extermination of all vestiges of private property in the country, including micro-enterprises, self-employed workers, street vendors and even simple shoe-shine stands. The measure, which Carlos Rafael Rodríguez and Juan Almeida opposed (as Daniel Alarcón Ramírez, "Benigno," recounts in his book Memories of a Cuban Soldier), was accompanied by Castro's decision to close Accounting schools throughout the country and suspend the practice at companies.
This foolhardy decision was based on the purely Castroist notion that Cuba would jump from the socialist phase of its economy directly to a communist form of organization in which "monetary-commercial relations" would disappear and money would not be needed. In this way, Castro revealed not only his dire ignorance of the most fundamental elements of economics, but also a lack of understanding of how an economy is supposed to operate under socialism.
The intrinsic inefficiency of socialism and planning was compounded by Castro's destructive influence on the economy. By aspiring to eliminate money, Castro aimed to dispense with one of humanity's greatest inventions and its functions. This hairbrained idea was tantamount to prohibiting the use of the wheel, and is an episode placing in doubt the ruler's responsibility, and even his intelligence.
Without accounting, companies lost any ability to track costs, income, profits and losses, and were unable to manage their entities in a rational way for several years. Accounting is the backbone of any management system. It was not until the 1970s that accounting began to be restored and some order was restored to planning, but the aftermath of the damage inflicted on companies lingers to this day, and is at the foundation of the current productive incapacity and inefficiency of the Cuban economy.
In Cuba, chronic shortages affected more than the supply of consumer goods and other short-term supplies, such as raw materials and spare parts. The loss of trade links with other countries, especially the US, adversely affected the acquisition of capital goods such as transport and construction equipment, agricultural and industrial machinery, power plants and many other things. These shortcomings have added up over the years, progressively and inexorably debilitating the productive capacity of all the country's sectors, down to this day. One of the most pernicious effects of this process has been how it has undercut Cuban companies' capacity to invest, such that Cuba now depends on the importing of foreign administrators for many of its new investments.
Various forms of decapitalization
The loss of Soviet subsidies in 1991 sent the Cuban economy reeling, forcing all Cubans, including Fidel Castro, to face a harsh reality: the socialist economy the leader had adopted was unable to sustain the country. Exercising the political control made possible by totalitarianism, the regime has survived, precariously, through a series of makeshift, emergency measures, such as opening up to international tourism, accepting remittances in dollars from Cuban exiles, and exporting medical services.
Despite these stopgap steps, the current crisis transcends the fact that the Cuban economy is not growing. It is much more serious: the economy is actually contracting because it is not even able to generate the resources needed to replace or maintain capacities previously created. As a result, the economy has been suffering from decapitalization. This exceptional phenomenon, visible in the physical deterioration of the island's homes, buildings, industrial plants, infrastructure, plantations and livestock, has been an ongoing blight on Cuba's society and economy since the beginning of the Revolution and its 63 years of government. (Although new construction is reported in the Tourism sector, the rest of the economy is regressing.)
Alongside the physical and financial decapitalization of its economy, Cuba has suffered two additional forms of decapitalization: human and social. As a result of the lack of opportunities to improve living conditions, the country has been losing its most educated personnel, its human capital, including many people that the State itself had held up as one of the great achievements of Cuban socialism. In addition, the restrictions imposed on private initiatives to organize social, cultural and political activities have hindered the development of the country's social capital; that is, the set of interpersonal relationships that enrich the life of every society, already weakened since 1959 as a result of the intrusive policies of a Government that moved to control all aspects of the country's life.
The root of Cuba's economic problems, however, runs much deeper. In a letter to his assistant Celia Sánchez written in June 1958, Fidel Castro stated that "when this war is over, a much longer and bigger war will begin for me: the war I am going to wage against them (the United States). I realize that this will be my true destiny." Upon reviewing Fidel Castro's conduct in relation to the economy, one can conclude that, despite his statements about pursuing economic development and the improvement of Cubans' living standards, especially for the poorest, these were not his primary goals. From our current perspective, looking back, it is evident that the Revolution was carried out towards another end: basically, exploiting the country's economic resources to advance a personal agenda contrary to Cubans' interests.
Fidel Castro's legacy, then, is an economy in shambles left to those Cubans surviving on the island, and a country in urgent need of profound changes in those in government, the institutional structure of the State, and the productive system to allow free Cubans to once again be the owners of their economy and, along the way, their country.