Havana, Cuba — In this once spectacular tropical city, three buildings collapse from neglect every single day. There has been little infrastructure investment in 50 years and the average worker earns $20 a month. By almost any economic measure, socialism under Fidel Castro has been an abject failure.
Yet things are beginning to change. Presumed to be ailing, Castro has handed power to his brother Raul, who is permitting modest levels of private enterprise and home ownership. Meanwhile, President Obama has eased U.S. travel restrictions to Cuba. Legal passage from the States has soared more than 10-fold in a decade. Most of the 600,000 U.S. residents expected to visit Cuba this year have family there, but conventional tourism is on the rise as well. I was there in January on a people-to-people visa.
Critics worry that tourist dollars will prop up the failed socialist system and prolong its grip. But based on my trip, there’s reason to believe the opposite may prove to be the case: Spirited young entrepreneurs are rising from Havana’s rubble to take advantage of these small but important signs of economic liberalization. Interestingly, Cuba’s glacial but perceptible shift to the right comes as the U.S. has turned sharply to the left, raising income taxes on the rich and searching for other means to redistribute wealth.
I was introduced to this burgeoning new economic order through a young entrepreneur I’ll call Javier. Javier did not ask that I not use his real name, but after speaking frankly with me about emerging Cuban business opportunities, Javier worried that he had made dangerous political statements. If he were judged to be subversive, his budding business empire could be shut down in minutes.
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Javier is 31 years old. He’s college educated, speaks fluent English, and calls himself “ambitious and restless.” He has taken advantage of the fledgling residential real estate market in Havana, brokering home sales from struggling Cubans to fellow countrymen with money sent from family in the U.S. and abroad. (Foreigners are not allowed to purchase homes directly, so they do it through family.)
Javier has invested his real estate commissions in a “paladar,” which is a private, family-run restaurant permitted since the early 1990s. Paladares typically are converted residences; they serve authentic Cuban cuisine to tourists seeking a higher quality dining experience than is available at government-run restaurants.
It took Javier three years to convert his residence to a paladar, where the meal was among the best I had while in Cuba. Now he wants to use his restaurant business to meet more wealthy foreigners who want to buy a home through their Cuban families. In other words, he’s looking for business synergies. He’s also bolstering his finances through creative accounting that helps him avoid taxes of 50% on earnings over $50,000 a year.
What could be more entrepreneurial than synergies and, well, tax planning? Javier strikes me as the kind of Cuban who could become a millionaire if true reform ever comes.
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Socialism here has managed to raise the living standards of the destitute, the bottom 20%. But virtually all others have fled or been dragged lower. Whatever leadership succeeds Fidel and Raul, it will have to confront the basic question of whether raising the living standards of the very poorest is worth the toll it has taken on the rest, as well as the toll it’s taken on the country’s infrastructure and even its fertile landscape—much of which is now grown over with weeds.
Even dictators want some level of popular support. Castro earned his by lifting the poorest and stirring nationalist emotions in a historically colonized land. But the physical decay is so extreme that it is difficult to imagine any new leader succeeding without reinvigorating an economy that has been bled dry. Perhaps the post-Castro government will consider whether a more open economic policy might lift all boats. Even the poor benefit from greater growth, as empowered capitalists have started to show in China.
Traveling in and around Havana offers stark lessons in the futility of socialism. Billboards are non-existent; there is nothing to advertise except “La Revolución” and “Más Socialismo,” largely self-explanatory terms you find painted on fences and printed on banners on many city blocks, promoting the government.
Castro elevated health care, education, and the arts. But he did so in part by diverting pesos from sorely needed infrastructure rebuilding. All of Havana is literally crumbling. Stunning facades have fallen in heaps. Throughout this city, brilliant but severely worn architecture lies masked behind the drying laundry of impoverished families crowded into space that at one time bustled with trade and the activities of the well-to-do.
There are jobs for everyone; unemployment stands at less than 2%. But wages are so low that little gets done. Cuba’s productivity per person ranks among the lowest 3% in the world. A popular refrain heard throughout this city: “Fidel pretends to pay us and we pretend to work.” The only jobs that matter are those where you can pilfer goods from the workplace or which give you access to tourist money. Tour guides and artists who sell to visitors command enviable incomes. Butchers earn more than doctors.
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The country’s GDP is $60 billion, about the same as the state of New Hampshire. California alone produces $2 trillion annually. Roughly 5% of Cuba’s “output” is gifts to its residents from exiles sending “remittances” to family in Cuba.
While America’s recent political shift to the left under Obama is in no way comparable to the Más Socialismo of the past five decades in Cuba, the pendulum swing nonetheless reflects our own internal debate as we have raised taxes on the wealthy. Our tax-the-rich movement has spurred talk in some wealthy segments of fleeing high-tax states like California and New York, and of retiring to non-productivity rather than forfeit so much income.
That might sound like rich-folk blather, and certainly there are ample good reasons that U.S. tax policy has moved this direction. Even a hard-core capitalist like Warren Buffett has endorsed the extra toll on the wealthy. We’re not and never will be Cuba. But a tour of Havana reminds you just how wrong wealth redistribution can go.