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The Embryonic Free Market

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October 25, 2017

In my lifetime, I’ve witnessed five Cubas.

Pre-Revolution, 1952-1958

In the 1950’s, the Cuban people suffered under great oppression from its military dictator, Fulgencio Batista. The great majority of Cubans at that time lived in fear and welcomed regime change. That change came from Fidel Castro and a small band of rebels in 1959. Although the rebels were poorly armed, poorly trained and were by no means expert military strategists, they had a distinct advantage: the Cuban people would get behind nearly anyone who would oust the tyrannical Batista.

The Soviet Years, 1959-1989

Following the revolution, Mister Castro went to New York and appealed to the US government to recognize his leadership. Unfortunately, Mister Batista had been a US Government toady and the Mafia was heavily invested in Havana hotels and casinos. Mister Castro had destroyed those cosy relationships and the US was unquestionably not going to give him its seal of approval.

At that time, Mister Castro was not a communist. In fact, he followed no particular philosophy of governance whatsoever. He merely sought power and was open to whatever offers were on the table that might ensure it.

But he didn’t have to wait long. The USSR realized that Cuba was a real plum, geographically, and, in trade for Cuba declaring itself to be communist, the USSR provided considerable military support. The Soviets also offered to buy Cuba’s main export product – sugar – at three times the going rate. Cuba then entered into an unsound economic system. Although it would lose the productivity of the free-market system, the government would gain the benefits needed by Mister Castro to solidify his power base. (It’s important to note that, although political victimisation still existed, it was below what had existed prior to1959.)

Under the new collectivism, the possession of US dollars was punishable by up to two years in prison. Foreign exchange stores were only for foreigners and the politically well-connected. But whenever a government places a wet blanket on the free-market, a black market arises in proportion to the suppression of the free market.

It’s often been assumed that political oppression in the Soviet period must have been severe, or the people would have overthrown the government. But this is not so. The reason why Cubans were largely accepting of the system was that the black market functioned well. Bureaucrats embezzled funds under an inefficient system, state-owned goods were routinely stolen, underground entrepreneurships flourished and, in general, life was better than it had been prior to 1959. In addition, literacy and healthcare became free to all, a fact that’s cherished by Cubans to this day.

The “Special Period”, 1990-1999

But, with the collapse of the USSR, all bets were off. The false economy crashed with a bang. Mister Castro euphemistically declared a “special period,” in which education and health care would remain as major priorities, but poverty would become rampant. I can remember that, in the 1990’s no dogs or cats were seen on the streets of Havana, as meat was so scarce that a pet in the stewpot was considered a luxury. Early in this period, a major attempt was made to create an international tourist market. College professors, doctors and engineers were pleading for permission to quit their professions to become bus drivers, tour guides and waiters. At that time, a tour guide or hotel bartender might comment to me that he’d gain more in tips in one day than he’d earn in a month from his government-provided salary as a surgeon or attorney.

But, as much as the government sought to oppress such exchanges, a new class arose in Cuba. Those who received tips, or ran off-the-books businesses in tourism, soon were moving into better homes, buying more and better goods for their families and, most importantly, growing the economy. As poverty was otherwise so dire, the “new rich” could now afford maids, nannies and gardeners – job descriptions that had fallen out of existence in the Soviet era. The black market, in fact, became the dominant market and, in effect, an ad hoc free market, as it operated without regulation and by supply and demand - the cornerstones of any free market.

Anyone who embezzled state-owned goods, sold his paintings on the street, or rolled cigars for tourists was living better than degreed professionals. So, why then, was this new class not crushed by the government? Well, the average bureaucrat had the opportunity to provide permission, look the other way, or divert state-owned goods and himself become one of the new “rich”. The black market benefitted virtually everyone.

This brought about a profound change in the Cuban people. The older generation, who remembered the Batista days, often remained dedicated to “the revolution,” but younger Cubans were less interested in revolutionary platitudes and collectivist rhetoric and were more interested in the new prosperity, no matter how moderate it was by international standards.

The Recovery, 2000 – 2013

Conditions improved over the decade of the Special Period, but expanded dramatically when failed Venezuelan revolutionary Hugo Chávez came to Cuba in 1997. He was treated as a hero on his arrival and was promoted unceasingly by Mister Castro. In gratitude, when Mister Chávez became president of Venezuela in 1999, he provided much needed oil and goods to Cuba and the Cuban economy.

This did not eliminate the black market. It enriched it. Like never before, the economy expanded and, by the time Fidel Castro handed the reins of state to his brother Raul, the writing was on the wall. Over the years, such a large percentage of Cubans were operating off-the-books businesses that they became the backbone of the economy. Increasingly, free-market suppression was lifted to allow these cuentapropistas to operate legally, since, if they were licensed, they could be taxed, thereby funding the state, which up until this time had not been getting a cut from the black market.

The Renaissance, 2014-

After the younger Castro took office, more restrictions were lifted and soon, the main legalized economy was being created by the cuentapropistas – the inventive restauranteurs, the entrepreneurs who were running their own taxi companies, and the owners of the casas particulares – private houses that were offered for rent to tourists.

Today, unlike so many countries in the world, the regulations are diminishing in Cuba, rather than expanding and the economy is being driven by a black market that’s in the process of being converted to an increasingly legal free market.

It should be noted that this was in no way brought about by the “historical” visit by US President Obama. If anything, his visit was an attempt to ride the new wave of freedom now being born in Cuba. His demands of Raul Castro that he “play ball” with the US were rejected and, as the US continues to decline under oppressive regulation and indebtedness, Cuba will continue to rise out of its long collectivist slumber.

The takeaway here is that, whether it be Cuba, Zimbabwe, Argentina or Venezuela, over-regulation by any government causes a black market to be spontaneously created by the people of a country. Eventually , even top government leaders come to rely on the black market, as it works better than an oppressive system and, at some point, the black market becomes legalized and morphs into a free market. And, in any country, the very life-blood of prosperity is a free market. No amount of political rhetoric or collectivist ideology has ever, or will ever change that essential economic fact.


Jeff Thomas is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government. He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man (http://www.internationalman.com) and Strategic Wealth Preservation in the Cayman Islands.

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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