Why Cuba is having an economic crisis

Three crises and a whole lot of bad policy decisions have driven hungry Cubans into the streets.

Cuba is in chaos. A wave of protest has been followed by internet blackouts, reports of shootings, lists of missing persons, videos of police brutality, and all the other things we’ve come to expect from the recent years of civic unrest around the globe. The usual takes are flying fast and furious — tankies and other hard-leftists who screech “Hands off Cuba!!”, rightists who call for toppling the country’s government, and so on.

But what are people protesting about? As with most of the recent protest waves, Cubans are mad about some combination of economic concerns and authoritarian rule. Every report mentions how Cubans are going hungry, with food lines wrapping around the block and basic foodstuffs in short supply.

How did Cuba arrive at an economic situation so dire that it’s unable to feed its people? Traditionally, Cuba has been one of the least poor and least unsuccessful communist countries, probably rivaled only by the former Yugoslavia when it came to not screwing things up too badly. It’s much poorer than Mexico or the Dominican Republic, but is richer than Guatemala or Jamaica, and has fully recovered from the loss of Soviet subsidies in 1991.

But “least bad communist country” doesn’t mean “good”, and a series of bad policy decisions and external shocks has now led Cuba to a very difficult juncture.

Cuba’s dysfunctional economy

Cuba’s economy, unlike modern China’s, still deserves its communist name. The state directly owns and operates most industries. Raul Castro promised a bunch of reforms in 2011 and never delivered.

If you want a primer on how this dysfunctional economy works, I recommend this 2016 article by Cardiff Garcia. Here are a few key excerpts:

The Cuban state still directly controls most of the economy and employs the majority of the population: between about 60-75 per cent of the workforce…State salaries are abysmally low, roughly the equivalent of $25 USD per month…Many of the crumbling buildings that tourists like to gawk at are dangerous: collapses are especially frequent during heavy rains. Even in parts of Havana with its heavily touristed areas the sanitation is inadequate, leading to periodic outbreaks of dengue…

The Cuban government furthermore maintains a list of private-sector occupations that are allowed, though the ones that really matter are related to tourism: restaurants, bed & breakfasts, and taxi driving…Those Cubans who work in the touristic sectors that do price their services in convertible pesos make much more money than workers on government salaries. This creates an odd situation where highly trained and well-educated workers in occupations mainly provided by the state — engineers, say, academics or even doctors — are incentivised to take jobs as waiters and taxi drivers.

That’s not a great point to be starting from. But in fact it gets worse. Despite being endowed with rich soil, Cuba’s agricultural productivity is extremely low:

New government figures show that efforts to increase food production have made little progress, despite repeated calls from president Raúl Castro to boost production, smooth out inefficiencies, and reduce food imports. Cuba produced 2.4bn eggs last year, for example, nearly unchanged since 2011 and still insufficient to change the monthly ration of five eggs per person.

Farm yields are pathetically low, despite Cuba having possibly the richest soil of any tropical country in the world, said Pedro Sanchez, an agronomist at the University of Florida who was raised on a farm in Cuba and returns regularly. “They’re raising one tonne per acre of corn. It’s ridiculous,” he said.

Productivity is low for a number of reasons — lack of machinery, government as the sole crop purchaser, other various bad policies, and the legacy of a system that was more geared toward producing sugar exports rather than food. Repeated halfhearted attempts at reform have failed, and thus Cuba is chronically unable to feed itself, relying on imports.

This brings us to the last major dysfunctional thing about the Cuban economy — the dual-currency system. For most of its history, Cuba had two currencies — one pegged to the dollar that was used for import and export, and one that was only spent domestically, whose value was much lower. As this excellent and well-sourced Twitter thread by @red_dilettante explains, the dual currency allowed Cuba to ration foreign exchange:

JMC 🌹🏴 @red_dilettante

In that context, the party created a dual currency system that was essentially a way of first hoovering up and then carefully rationing the forex. This rationing system for forex persisted until 2020, when it was phased out just before the pandemic struck.

(Note: To get good information about the workings of communist economies, it really helps to read leftist writers, because they’re often the only ones who actually pay attention to how those economies work. Lots of people look at these economies and just yell “Communism bad!!”, which is true but also unhelpful; leftists bother to figure out why it’s bad.)

So Cuba is heavily dependent on food imports, and until very recently it used a very weird system to pay for those imports (which further distorted the economy in various ways). Then it scrapped that system, right as a once-in-a-century pandemic and various other disasters struck. Oops.

Anyway we’ll talk about the disasters, but first let’s talk about what isn’t making Cubans go hungry: The U.S. embargo.

It wasn’t the embargo

The U.S. has an embargo against Cuba, which means we refuse to trade with Cuba. Some Twitter leftists blame this embargo for Cuba’s current economic woes, erroneously calling it a “blockade”. But they’re completely wrong.

The embargo is not a blockade. The U.S. does reserve the right to levy sanctions against non-U.S. companies trading with Cuba, but in practice this is reasonably easy to get around. This can be seen by the fact that Cuba in fact does import quite a lot of stuff, which would be impossible if it were being blockaded. Trade was 27% of Cuba’s GDP, which is relatively low but is actually higher than the U.S. Food imports, as mentioned before, are substantial. Cuba’s biggest import sources in 2019 were:

1. Spain

2. China

3. Italy

4. Russia

5. Canada

6. The United States

That’s right, the United States! The embargo was altered in 2000 so that U.S. companies are allowed to sell food to Cuba. And we do! Indeed, we’re the largest exporter of food to Cuba. And Cuba usually gets plenty to eat despite the embargo.

Now, the embargo of course stops Cuba from exporting more stuff to the U.S.; if it could sell stuff like cigars and sugar to America, might Cuba might have an easier time getting foreign exchange? Probably not. Cuba can and does export stuff to China and Europe, but it runs a chronic huge trade deficit. This is because it pegs its currency (the convertible one) at too high a value, meaning that its exports are just too expensive. Bad macroeconomic management, not the U.S. embargo, is what’s making it hard for Cuba to purchase food. We’ll get to that macroeconomic bungling in a second, but for right now, let’s just make it clear that the embargo isn’t the problem here.

Now, that doesn’t mean the U.S. hasn’t contributed to Cuba’s crisis. It has, in other ways. The Trump administration ratcheted up pressure on the island, sanctioning tanker companies that carried oil from Venezuela to Cuba, making it somewhat harder to get fuel and modestly impeding efforts to boost Cuba’s dismal agricultural productivity. Trump also made it harder to send remittances from the U.S. to Cuba, which is another way Cuba typically gets foreign exchange (but this was exacerbated by Cuba’s own decision to curb remittances even more in an attempt to squash the forex black market).

So Trump’s aggressive measures certainly didn’t help Cuba. But the island nation’s main problems lie elsewhere — in a set of overlapping crises and policy failures that happened all at once. These were 1) the collapse of Venezuela, 2) the end of the dual currency, and 3) Covid.

Three crises at once

The U.S. started sanctioning tankers taking oil to Cuba in 2020, but Cuba has been having an energy crisis since 2016. The reason is that Cuba traditionally gets most of its oil from Venezuela, and Venezuela has been in an increasingly dire state of economic collapse for about a decade. Around 2016 its oil production began to nosedive, and by 2019 it was barely a third of what it had been:

In fact, Venezuela’s government considers Cuba such an important ally that it strove mightily to keep oil flowing to the island at a financial loss, even as its own people began to starve. But there was a limit to that process, and oil shipments to Cuba began to fall.

Cuba had trouble making up the difference from oil exporters who didn’t give it a special price like Venezuela did, because it didn’t have a ton of foreign exchange, due to keeping its convertible currency artificially pegged high; it basically had to choose between importing food and machinery or oil, and it chose food and machinery. Oil shortages have hurt Cuba’s traditional inefficient, fuel-intensive agricultural methods, forcing some farmers to go back to using oxen instead of machines. And lack of oil severely hurt the sugar harvest in 2020, which reduced Cuba’s already meager exports and therefore deprived it of precious foreign exchange that it needs to buy imported food.

That was the first crisis. The second was Cuba’s decision in 2020 to end its dual-currency system in January 2021. It decided to do this in order to prepare to make its economy more open and dynamic (read: more capitalistic), but the timing was really bad, because it happened to coincide exactly with the third and biggest crisis: Covid.

Covid did a bunch of stuff that really hurt Cuba. First, it utterly smashed the tourism industry. Remember, tourism is Cuba’s most vibrant and efficient economic sector, and it’s also a huge source of foreign exchange. When it got destroyed by Covid, it hurt economic output dramatically and made it much harder to get foreign currency with which to import food. A Covid outbreak at a big sugar mill also further damaged the harvest, and Covid forced Cuba to spend more forex importing more medical supplies.

At the same time, Covid raised food prices in global markets by about 40%. That meant that even as Cuba’s economy was reeling and its foreign exchange was dwindling, it had to use more of its precious forex for food.

Now, this was an incredibly bad time to go through with the elimination of the dual currency. When the dual currency was in effect, only the government and a few big approved players could exchange Cuban money for dollars or euros etc. But when Cuba allowed normal Cubans to convert their normal pesos to dollars, they started doing this en masse. Although officially the peso was still pegged to the dollar (albeit at a much lower rate than before), actually everyone in Cuba just started using the black market to grab dollars. That resulted in a big capital outflow, which made the Cuban peso worth much less on the unofficial black market — essentially, Cubans decided to hold a ton of dollars instead of using dollars to buy imported food, so Cuba stopped having enough dollars to buy food — a balance of payments crisis. At the same time the fact that Cubans didn’t want to hold onto Cuba’s currency caused massive inflation in peso terms, which made Cubans want to hold dollars instead, which just compounded the situation.

(Astute readers will recognize that this situation has some similarities to the typical emerging-market financial crisis story. Typically, a commodity-exporting economy pegs its currency high so that it can afford to pay for cheap imports to keep its people satisfied. Then one day some financial traders break the peg, the currency plummets, capital flows out of the country, the economy tanks and so on. Except in Cuba’s case they basically precipitated this sort of crisis intentionally, in the middle of a massive pandemic and a massive fuel shortage. Great thinking, guys!)

Anyway, what all of these crises and exacerbating factors add up to is a very simple equation for Cuba:

Not enough oil + Not enough dollars = Not enough food

And so Cubans poured into the streets, and the rest was history.

What can we do?

So that brings us to the question of what the U.S. can do to help Cuba. Unfortunately this is probably an irrelevant question, as we don’t actually want to help Cuba — our chief political goal is to appease the angry conservatives in Florida who want to keep the pressure on the communist regime until it collapses. But if we did want to help Cuba, what would we do?

Well, first we would obviously send some food aid. But beyond that, dropping the embargo is the best move for Cuba in the long term — not just because it would help Cuba boost exports and slightly alleviate its shortages of foreign exchange, but because it would help the island transition to a capitalist economy.

To transition to capitalism, Cuba needs more than just free markets — it needs foreign investment. Fortunately it’s a conveniently located island with great weather, lots of natural endowments, and a pretty well-educated populace. So it’s exactly the kind of place global companies would like to invest in. When Obama was trying to open up U.S.-Cuba relations, a bunch of companies were looking at investing in Cuba, but when Trump came to power and started getting really aggressive toward Cuba, all of that interest dried up.

By ending the embargo, we would therefore help Cuba move toward capitalism. This is basically what we did with China, except in that case it had the side effect of strengthening a country that was obviously going to eventually become our geopolitical rival. Cuba is not. A richer Cuba would be zero threat to us; instead, the greater threat is an unstable, impoverished island constantly trying to send us refugees. Ending the embargo wouldn’t cure Cuba’s current economic woes, but it would be the right thing to do, both for our national interests and for the good of humanity.

Update: Here is Brad DeLong and me talking about Cuba on our podcast, Hexapodia!

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