CubaBrief: Cuban officials refer to Hurricane Idalia as a Biblical “deluge.” Farber on the “new” Russian presence in Cuba. Rent seeking not free markets in Cuba.

Tropical Storm Idalia passed near Cape San Antonioin Pinar del Río province, Cuba’s westernmost province on August 28, 2023 becoming a Category 1 Hurricane around 9pm with 78 mile per hour gusts.

The effects of the storm were felt in Havana, but that did not stop Cubans from standing outside the Spanish Consulate in the driving rain to obtain a Visa to leave the island.  Video of which was taken by Forbes and is shared below.

The last major Hurricane to slam into Cuba was  Hurricane Ian on September 27, 2022, and based on how officials responded, there left a lot to be desired. Victims of Ian, a much more powerful Category 3 hurricane that also barreled over Western Cuba with catastrophic results, complained that they received little warning and aid from Cuban authorities. A year later, 60,000 houses damaged by Ian have not been repaired or rebuilt,”  reported the Miami Herald‘s  Nora Gámez Torres on August 29th. 

Official sources claim that damage done by Tropical Storm Idalia in Cuba were done to the electric grid, and agriculture, which were already in a very bad state before the storm’s passing. Cubans with their sense of humor say that this long term damage is due to Hurricane Castro, which has been underway for 64 years.

Twelve months ago, prior to Hurricane Ian’s devastating path through Cuba, a group of exiled Cubans requested that a humanitarian corridor be set up to directly channel aide to the island.  Eleven months ago, just hours before Hurricane Ian hit Cuba, a group of Cuban exiles requested that Meliá Hotels International, Iberostar, Kempinski, NH Hotel Group and others that operate in the island to shelter Cubans left homeless. We never heard back from them, and there were no reports of those who had their homes destroyed being sheltered in these hotels. Now another storm, thankfully Idalia was not as strong as Ian, has hit and we do not know the full impact, but we hope and renew this request that Cubans left homeless be given shelter in these hotels that have vacancies available.

In contrast with Communist Cuba, during the pandemic hotels across the United States opened their doors to those left homeless, and local governments and federal funds facilitated it. Despite the Castro regime’s communist propaganda, the numbers point  to Cuba having had a worse outcome during the COVID-19 pandemic than the United States.  Two numbers stand out: 354 and 550. In the United States, which had well publicized challenges and failures during COVID-19, excess deaths were 354/100,000. While Cuba, which was touted as a success story, had a worse outcome with 550/100,000 excess deaths. The Economist on August 3, 2022 published a piece on how “Covid-19 has damaged the reputation of Cuban health care“.

Samuel Farber, a social democratic critic of the Cuban regime,  yesterday Foreign Policy in Focus  warned about  “The New Russian Presence in Cubaand that right-wing Russians want to push Cuba toward a neoliberal economy.” Whereas Cubans are limited in how much paper currency they can withdraw from Cuban banks, it appears that Russians doing business in Cuba will not have that problem, and will enjoy other privileges denied every day Cubans living in the island.

“On Cuba’s part, Minister for Foreign Trade and Investment Rodrigo Malmierca declared that “we are working to ensure that Russian investments in Cuba enjoy special protection.” Along those lines, Putin’s most important envoy to Cuba Boris Titov, the presidential commissioner for the rights of Russian entrepreneurs, cited the great concessions made by the Cuban government. These include the granting of land to Russian agricultural producers for 30 years (compared to the 20 renewable years granted to Cuban farmers) and other possible exemptions of taxes related to those lands and tariffs, incentives such as new mechanisms to repatriate profits, and the development of a new merchant marine company to attract investments and facilitate trade with Russia. Russians could also open their own banks and use the ruble for commercial transactions.”

Interestingly, special privileges, denied Cubans, are not only granted to Russians.  In mid-February 2016, the Obama administration gave “its approval to the first American factory in Cuba in more than 50 years” and ABC News reported that “the move appears to have gained the support of the Cuban government as well.” Official communist publications, Granma and Juventud Rebelde, published stories praising the initiative. The US company, Cleber LLC, the first company with 100% North American capital, was going to set up operations in Mariel to assemble Oggún tractors, designed for small farmers to make land in Cuba more productive.

Ten months later in November 2016 Havana said no.

It turned out that one of the owners of the company that would set up the factory, Saul Berenthal, was a Cuban American, and in his enthusiasm, Mr. Berenthal had reclaimed his Cuban citizenship. This exposed the reality of the Castro regime’s internal blockade. Average Cubans living on the island are not allowed to make large investments into businesses, and this led to the deal being rejected. Paradoxically, the Obama thaw with Cuba also coincided with the expansion of military control of the Cuban economy.

Critics of U.S. sanctions, that have also been boosters for the recently legalized (2021) micro, small and medium-size private enterprises (MSME) which in the case of the middle-sized ones may legally have as many as 100 employees fail to mention that the prior Administration’s Cuba policy, which cracked down on trade between the Cuban military and U.S. entities had much to do with this liberalization. Farber at the end of his article issues a warning that instead of being prophetic, describes much of the present reality on the island, which also explains, in part, why so many Cubans wish to leave.

“The possible contributions of the Russian Federation do not appear likely to rise to the level of Cuban needs, at least in what concerns its economy. Besides, it raises the possibility that Russian initiatives will translate into the adoption of a racket-ridden state capitalism on the island, with a qualitative increase in corruption and social crisis.”

While Ferber captures the existing challenges with economic policies in Cuba, and the Russian threat to make it worse. He jumps the shark when he calls this “neo-liberalism” instead of what it actually is “state-capitalism.” Carlos Martinez, in his August 27, 2023 piece in EconLib, “Rent Seeking and Economic Transition in Cuba explores how the Cuban economy actually “works” without the rule of law, but with centralized planning, communist ideology, a dictator with a military conglomerate (GAESA), and the innate human desire to seek benefits, and live better. Martinez cites David R. Henderson, a research fellow at the Hoover Institute who was friends with Milton Friedman, and also familiar with the Austrian School of Economics, on the phenomenon of rent-seeking. Henderson defined it succinctly as the practice in which: “entrepreneurs obtain certain benefits and privileges via the political arena,” and what Martinez describes within the Cuban context as the “search for privileges.”   It is “supply and demand” in a free market economy, which by definition has the rule of law, to satisfy consumers for the benefit of the successful entrepreneur. What drives the entrepreneur in rent-seeking is “who do you know” in the ruling power structure that can offer you privileges denied to others. Unfortunately, rent-seeking exists everywhere, but in nations like Cuba and Russia, it is on steroids. As Martinez shows in his article, this has very different repercussions at the macro level. “It is here where entrepreneurs and rent-seekers diverge, while they are both entrepreneurs in the pursuit of profit, only market entrepreneurs profit by making society better off. However, their addition to the wealth stock is different.   This also explains “economic reforms” in Cuba under the current dictatorship. Cuban officials do not seek a free market, but to extinguish the only free market that exists in Cuba today, the informal market, also known as the black market, where Cubans can directly trade with each other without having to deal with the regime.

The so-called economic reforms implemented by Havana have resulted in tremendous inflation on the island, and the claims that they lack the ability to print the national currency. This is the most common pretext for the recent restrictions on cash transactions and ATM access. However, the reason Havana is turning to digital banking is to exert more control over the economy, which would exacerbate the dictatorship’s continuing crackdown on the black market.  This also may explain, despite all of the hype surrounding micro, small, and medium-sized enterprises (MSMES also known as MIPYMEs), no steps have been taken to create a meaningful opening in the agricultural sector, i.e. Cuban farmers markets, as was done during previous crises in the 1980s that domestically handled the food crisis problem for a short period of time only to be terminated to regain regime control over the means of production.

Miami Herald, August 29, 2023

A Biblical “deluge”: Idalia trashes Western Cuba with heavy rains and flooding 

By Nora Gámez Torres  

Updated August 29, 2023

It is not your average hurricane story when Granma, Cuba’s Communist Party newspaper, quotes the Bible. 

But the heavy rain that Idalia, now a Category 1 hurricane, has been pouring over Western Cuba on Monday night and Tuesday, leaving residents in several towns wading in knee-high water and small rural communities incommunicado, prompted a reference to the Great Flood. 

Idalia strengthened as a hurricane soon after its center passed very close to Cape San Antonio, the island’s westernmost tip in Pinar del Río province, around 9 p.m. on Monday. A weather station there reported hurricane wind gusts of 78 miles per hour. But Cuban meteorologists warned the worst was still to come from Idalia’s spiral rain bands and the storm surges later Tuesday before the hurricane moves to hit Florida next.

[ Full article ]

EconLib, August 27, 2023

Rent Seeking and Economic Transition in Cuba

By Carlos Martinez 

The invention of the concept of rent-seeking has made a powerful impact on economic science. Comparative economics, especially the study of economic transitions, has been particularly affected as rent-seeking nicely explains the behavior and institutions involved in the processes and unintended consequences of transitioning to different economic systems. For this reason, the case of Cuba is perfect to be explained in terms of rent-seeking and the search for privileges. 

The idea of rent-seeking – as described expertly by David R. Henderson – is that entrepreneurs obtain certain benefits and privileges via the political arena. Rent-seeking behavior can include everything from tariffs or subsidies protecting a specific interest group, to patents and licenses.  

The choice to engage in rent-seeking is rational when the expected costs of wealth transfers via political pursuits are lower than those of engaging in the market process. In modern economics, rent-seeking is categorized as a zero-sum game or wasteful behavior. Rent-seekers do not create value through production; they instead capture wealth from other entrepreneurs, possibly wasting resources and destroying wealth in the process. 

In contrast, market entrepreneurs make their wealth by producing the best quality goods at the lowest and most affordable prices. And, in the eye of comparative advantage and specialization from trade, they secure this wealth through mutually beneficial trade with the consumers and other sellers. In other words, gains from trade.  

It is here where entrepreneurs and rent-seekers diverge, while they are both entrepreneurs in the pursuit of profit, only market entrepreneurs profit by making society better off. However, their addition to the wealth stock is different.  

Despite being a net drain on society, rent-seeking never ceases to exist, though it differs from country to country. Such variations result from differences in institutional arrangements which determine how profitable rent-seeking activity is and, therefore, how much occurs. As the American economist William Baumol put it, “Changes in the rules and other attendant circumstances can, of course, modify the composition of the class of entrepreneurs and can also alter its size.” When the rule of law is absent, and the law is unpredictable, not applicable to everyone, and unequal, rent-seeking reigns freely. 

Once rent-seeking has been connected to the concept of institutions, we may propose a case study to explain the phenomena of economic transitions. With the recent approval of a law that legalizes small and midsize enterprises, many commentators have claimed that capitalism might be returning to Cuba. Although this claim must not be outright discredited, clarifying the true state of affairs is still necessary.  

In the political economy of Cuba, the rule of law is absent, property rights are not protected, and legal exchanges often cannot take place – these factors conspire to make a free market impossible. Moreover, allocating property rights via political means could never be considered capitalism, as it substitutes political competition for competition in the market sphere market. Put differently, Cubans are not competing in the market but for the right to enter it. Moreover, the 18th article of the Cuban constitution states that: 

The Republic of Cuba is governed by a socialist economic system based on ownership by all people of the fundamental means of production as the primary form of property as well as the planned direction of the economy, which considers, regulates, and monitors the economy according to the interests of the society.” 

While the Cuban government might have changed the players, the rules of the game, that is, the institutions, have stayed the same. Even Gil Fernandez, Cuba’s Economic minister, has stated that Cuba is still a centrally planned economy despite the recent market-oriented laws. This phenomenon is similar to the Perestroika period in the Soviet Union, as Peter Boettke pointed out in his book Calculation and Coordination

“Thus, despite the rhetoric promising enterprise autonomy, the Law on State Enterprises – the centerpiece of perestroika – was never intended to substantially change the basis of state central planning (see Ericson, 1988, 1989). More recent “reform” decrees and laws have similarly claimed to accomplish much but in reality made little substantial difference.” 

Putting aside the fact that these enterprises will play a secondary role in the economy, the legal, financial, and economic regulations they face impose substantial expected costs on entrepreneurs on the island. The Decree Law 46/2021 introduces a myriad of regulations seemingly aimed at regulating the emerging private sector, but which, in practice, often result in undue restrictions on private initiatives. These restrictions extend to the number of employees and partners an enterprise can have and the sectors they are allowed to operate in. Nonresident individuals and legal entities, including potential investors, grapple with stringent limitations when initiating a business venture. Such limitations prioritize natural-born citizens and residents, thus narrowing the field of potential participants. 

 An overarching concern emerges with the incorporation of small and midsize companies, as the process is subject to the Ministry of Economy and Planning approval. This requirement inadvertently fosters an environment conducive to rent-seeking, wherein political connections become a means to secure approval rather than the strength of the business proposition. This phenomenon further increases the expected costs of engaging in the market. Moreover, the tax regulations, which are intended to provide a revenue stream for the government, are not tailored to facilitate a straightforward path for entrepreneurs to achieve profitability. Consequently, this intricate tax system adds to the already onerous burden of entrepreneurship, exacerbating the gap between the costs of engaging in legitimate market activities and those of seeking political favor. 

Another critical confusion is the assumption that the liberalization of some limited and regulated markets indicates a free market—in fact, nothing is further from reality. The presence of some consumer markets does not indicate capitalism if the state lacks the very institutions needed to be capitalist. Another question to ask, considering this law of small and midsize enterprises, is if everyone can even open one of these newly legal companies in the first place? It is hard to believe that Cuba would allow any of its 1037 political prisoners or their family members to open an enterprise.  

Not even Cuba’s financial press can be trusted to provide an accurate account of what’s happening, as they, too, have experienced political pressure, as evidenced by the many constraints placed upon elToque, who has been reporting the exchange rates between the Cuban peso and the U.S. dollar. The official statistics are hard to acquire and even harder to believe; in many instances, the time series that the Cuban government publishes are either non-accessible or nonexistent. This makes it more challenging to prove that Cuba is transitioning to a market or market-friendly economy. 

So far, the expectations for the Cuban economy are an economic transition a la Russia. In fact, Cuba has been seeking the advice of Russian officials and economists to provide the structural changes the economy needs to be more productive or at least more connected to rational economic calculation. 

The concept of rent-seeking has proven to be a valuable lens for understanding economic transitions, exemplified in the Cuban case. The distinction between rent-seekers and market entrepreneurs highlights the contrasting paths to wealth creation and societal impact. The analysis of Cuba’s economic situation reveals the persistent challenges of institutional constraints and central planning. As the country embarks on potential changes, careful evaluation of rent-seeking behaviors and their consequences remains essential to gauge Cuba’s economic future trajectory. 

Foreign Policy in Focus, 29 Aug 23

The New Russian Presence in Cuba

Right-wing Russians want to push Cuba toward a neoliberal economy.

By: Samuel Farber

At the beginning of this year, Russia signed an agreement with the Cuban government promising to significantly increase its participation in the Cuban economy. This comes more than 30 years after the collapse of the Soviet Union and the period of the great influence and close association that Moscow had with Havana.

But why now? Putin is eagerly looking for allies wherever it can find them, especially considering the military, economic, and political impact that the Russian invasion of Ukraine and its subsequent crisis like the rebellion led by Prigozhin has had on Russia. However, the Russian economy was weak even before the invasion of Ukraine. The economic weight of Russia does not principally reside in its manufacturing and industrial power but on its status as a mayor extractor and distributor of hydrocarbon products, and on a smaller scale as producer and distributor of other services and products such as weapons.

Although Russia was apparently successful in its neoliberal campaign from 2024 to 2018 in reducing inflation and implementing budgets with surpluses, as well as in creating large monetary reserves and a lower national debt, it failed to overcome its chronic low rate of economic growth. A 2019 Chatham House study by Philip Hanson points out that this success was achieved at the expense of great sacrifices by the Russian people, especially among retirees, and through the prevention of massive protests by the repressive Russian system. This autocratic system, according to Hanson, with its characteristic corruption and its intrusions in the economy and society, constitutes an obstacle for private investment and competition. Hanson ignores the role of the state in boosting economic growth in the Soviet Union and China, albeit in a highly brutal and harshly antidemocratic manner. Yet, Hanson is correct to argue that any attempt to establish reforms in Russia, like the rule of law, runs the risk of destabilizing the existing political system. For these reasons, concludes the British study, such an attempt will not likely be made.

Russia has promised great results with its investments and collaboration with Cuba, but the specific projects that Russia has announced for the island are relatively meager. For example, on May 20, 2023, the website of the Russian Federation referred, in very general terms, to the implementation of projects in the areas of construction, digitalization, agriculture, transport, logistics, tourism, and banking. At the same time, Russian entrepreneurs and functionaries signed agreements with their Cuban counterparts to improve rum and sugar production, ensure the provision of wheat and oil to the island, and to repair tourist installations in poor condition. But there are few specific projects and many of those announced are small and local, like the establishment of a hotel for Russian tourists, the accreditation of 14 Russian enterprises by the Cuban authorities to sell food to the population, the export to Russia of almost a million dollars’ worth of fruit, the creation of a wholesale market to sell Russian merchandise, plans to repair and modernize one sugar mill in central Cuba, and the renovation of the factory Antillana de Acero.

On Cuba’s part, Minister for Foreign Trade and Investment Rodrigo Malmierca declared that “we are working to ensure that Russian investments in Cuba enjoy special protection.” Along those lines, Putin’s most important envoy to Cuba Boris Titov, the presidential commissioner for the rights of Russian entrepreneurs, cited the great concessions made by the Cuban government. These include the granting of land to Russian agricultural producers for 30 years (compared to the 20 renewable years granted to Cuban farmers) and other possible exemptions of taxes related to those lands and tariffs, incentives such as new mechanisms to repatriate profits, and the development of a new merchant marine company to attract investments and facilitate trade with Russia. Russians could also open their own banks and use the ruble for commercial transactions.

Given the nature of Russian state capitalism, including corruption and racketeering, this new phase of Russian economic intervention in Cuba will differ not only from the role that the USSR played until it fell apart, but also the role that Spanish and other European Union investors play in Cuba today. The latter generally follow normal capitalist practices in terms of investments and rates of profit, except to the degree that these have involved the internal organization of the Cuban economy and society in labor and fiscal questions, among others. Thus, for example, according to Boris Titov, the financing of new projects like the establishment of a new hotel in Havana specially designed for Russian tourists will be undertaken by a fund of the Finance Ministry of the Russian Federation, in this manner combining state action with supposed private initiative that is linked to Putin and his henchmen. Approximately 120 millionaires control 70 percent of the economy due to the frequently corrupt concessions that have reinforced the links between the new capitalists and Putin’s regime.

In the meantime, the so-called Russian private sector has gone much farther. In January, the Russian news agency Interfax reported that a “Russia-Cuba Business Council” of more than 100 industrial and commercial companies, presided over by Boris Titov, was exploring “the economic transformation of Cuba based on private companies.” In fact, Titov has publicly declared that Cuba should open the whole of its economy. During a meeting that Titov had with entrepreneurs from the Moscow region, he compared Cuba with the USSR of the late 1980s before the beginning of the great wave of privatizations that were for the most part based on the theft of public property.

Is not at all clear if declarations such as Titov’s mean that the Russian capitalists linked to Putin’s regime are ready to go beyond their role as foreign investors to politically pressure the Cuban government to undertake a large-scale privatization of the Cuban economy. If this is the case, despite the welcome that the Cuban power circles have given to Russian private initiatives, most of the Cuban political bureaucracy will react very negatively to proposals such as Titov’s. The Cuban bureaucracy has approved foreign investment in new enterprises, generally in association with the Cuban state, but has opposed the privatization of existing state enterprises, including the 285 state enterprises that have reported losses, according to data provided by the Cuban authorities in March. There are exceptions to this general rule, such as in the restaurant sector, where small enterprises such as cafeterias that have clearly demonstrated that they are not viable as state property have been converted to cooperatives, formed from above, of the workers in this sector.

The Russian Economic Cast in Cuba

Putin’s principal representatives who are negotiating the new economic relationship with Cuba are associated with the Russian political right. Boris Titov, who heads the list of Putin’s envoys to Cuba and has been the presidential commissioner for entrepreneurial rights since 2012, is an entrepreneur and politician who has led the small Party for Economic Growth that previously was known as Right Cause. As such, Titov has participated in Putin’s electoral farces that allow for the existence of small parties who put up their own candidates but that eventually support Putin when he is elected. In the presidential elections of 2018, Titov finished in sixth place with 0.76 percent of the vote.

But the most surprising and even shocking new Russian presence in Cuba is the Institute for the Economy of Growth, Stolypin P.A. named in honor of Piotr. A. Stolypin who was prime minister and minister of the interior of the Tsarist government from 1906 until his assassination in 1911. Stolypin was a violent and energetic represser of the groups and parties opposed to the Tsarist tyranny, but at the same time he tried to modernize the archaic Russian agriculture both technically and socially. Stolypin’s project was a version of what Antonio Gramsci later called a “passive revolution,” in this case an agricultural modernization from above that would only benefit the landlords and the prosperous peasants.

Today, the Stolypin Institute proposes that Russia should change from its model based on the export of raw materials to the “competitive” model based on the development of small and medium-size enterprises, improvement of the productivity of labor in the private sector, the creation of a new digital economy, and a social sector that functions well (a euphemism for a “social sector” that is small and with the lowest possible public cost.) But, according to the Stolypin Institute, the principal problem is the economic uncertainty that prevents the Russian economy from growing. What we need, insists the Stolypin Institute, is certainty in economic and social policies. The Institute does not say a single word regarding what undoubtedly constitutes the principal source of this uncertainty: the absence of democracy in Russia in every sense of the term, and consequently the absence of the rule of law. The silence of the Stolypin Institute with respect to this fundamental problem of the Russian political and economic system is far more eloquent than anything from its spokespeople and publications.

It remains unclear how far the Stolypin Institute is willing to go in its consultations and advice to the top economic and political officials of the  “Marxist-Leninist” Cuban state and how those high bureaucrats would respond to the interference of the Russian right in the domestic affairs of the island. If Russian economic interference does not lead to significant improvement in the Cuban economy that somehow “compensates” for foreign interference and the corruption caused by such intervention, the answer of Cubans, be they bureaucrats, workers, or professionals, will be highly negative.

The Cuban Economic Situation

The Cuban government is by and large receptive to recent Russian initiatives because of the very serious economic crisis affecting the island, which is approaching the economic disaster that the country suffered in the wake of the collapse of the Soviet bloc. Today, Cuba suffers a grave shortage of the basic products needed for the health and nutrition of its population. Inflation reached 45 percent in April 2023. It’s no surprise that one dollar recently traded for 240 pesos, which 10 times the rate of 24 to 1 that was common until recently.

This crisis has produced the greatest wave of emigration that Cuba has ever witnessed. This wave has been permitted and indirectly stimulated by the Cuban government. Since November 2021, Cubans don’t need to obtain a visa to enter Nicaragua, from which they undertake the long, costly, and frequently dangerous trip to the U.S.-Mexico border. As an ally of the Cuban government, Nicaragua would not have established such a policy without the consent (and likely encouragement) of the Cuban government. By the end of 2023, more than 450,000 Cubans will have emigrated during the previous two years, an extraordinary number for a country of 11 million people. This emigration, especially of young people, will aggravate the demographic crisis that Cuba has experienced for several decades.

Among the immediate causes of the present crisis include the great impact that the COVID pandemic had on Cuba and the consequent dramatic reduction of tourists, along with the measures that Donald Trump adopted to worsen the impact of the criminal blockade of Cuba that President Biden has modified to a very limited extent. For its part, the incompetence and clumsiness of the Cuban government also played an important role in this crisis, particularly its “reordering.” During the great shortage of dollars and euros provoked by the fall of tourism, this monetary reform provoked a great deal of inflation by raising the value of the Cuban peso without a corresponding increase in the productivity of the Cuban economy. Another result of the crisis was the relaxation of government controls over the economy in 2021, allowing the expansion of the private sector with the legalization of micro, small and medium-size private enterprises) which in the case of the middle-sized ones may legally have as many as 100 employees.

In this context, the new Russian policies in Cuba must be viewed with considerable skepticism. The possible contributions of the Russian Federation do not appear likely to rise to the level of Cuban needs, at least in what concerns its economy. Besides, it raises the possibility that Russian initiatives will translate into the adoption of a racket-ridden state capitalism on the island, with a qualitative increase in corruption and social crisis.