“Capitalism is the unequal distribution of wealth – but socialism is the equal distribution of poverty.” – Unknown
Q3 hedge fund letters, conference, scoops etc
Dear friends,
This is my last post of the year. I recently got back from a special place, Cuba, a country of particular interest to me and one that has obsessed Americans over several decades. Americans, they know Cuba. I understand the fixation; at one point in 1962 this small island just 90 miles south of the coast of Florida had nuclear missiles pointed at them, in an episode called the Cuban Missile Crisis (spoiler alert: it ended well). They are also very aware of Cuba because of the Bay of Pigs, Fidel Castro, Guantanamo Bay, the Elian kid, which some people said that Al Gore lost the presidency over it. Many people remember the shooting down of two civilian planes by Cuba. And many people remember Alan Gross and their five spies—or heroes, as you wish—who were incarcerated in the United States. So since the U.S. is always having this tense, fraught relationship with Cuba.
It was my 2nd time to Cuba. As a Canadian citizen we are very welcome. We are also a major contributor to their biggest economic sector; tourism. We bring the hard currency their desperately need and in exchange they give tourists monopoly money, also known as the Cuban Convertible Pesos (CUC).
This time it was a different trip. We were twelve people. Three couples with 6 kids all 4 years old and under, or as my wife put it, 3 moms + 9. Travelling with very young kids is a different kind of trip.It’s not a vacation. It’s basically travelling with very young kids. In other words, we were a mobile daycare. This is not a post about travelling with little kids, a topic that could be turned into a series of popular self-help books for families. I’m here to give an update on Cuba.
Why write this post? If you ever wondered what a country would look like after 50 years of total government economic controls, you need only to make a trip to Cuba. While the era of the socialist experiment is over, the nostalgia surrounding it is growing (think Bernie Sanders). This is about learning from the past to prevent future mistakes.
Tale of Two Economies: Singapore And Cuba
Cuba
In 1958, Fidel Castro, Ché Guevara, Raul Castro, and their companions drove out forces loyal to Cuban dictator Batista and rode triumphantly into Havana. Then Cuba embarked on a massive social experiment.
After the revolution Castro’s Cuba soon gravitated toward communism and openly courted the leaders of the Soviet Union. Of course, communist Cuba would be a thorn in the side of the United States for decades, triggering international incidents such as the Bay of Pigs and the Cuban Missile Crisis. After Cuba nationalized approximately $1 billion of US-owned property without compensation, the United States imposed a trade embargo in 1962 that led to years of hardship for the Cuban people. By the way that embargo hasn’t made sense for a while now.
The results of the revolution haven’t made Cuba a rich country. The Cubans are poor, but not poor in the sense that Haitians are poor. It’s poor in a different way. Doctors, pharmacists, lawyers, and clerks alike all make 25 Cuban pesos a month (~$33US). This may seem like an absurd income, but everything is paid for. They have free healthcare and free education. Their housing is paid for. Almost all their basic needs are met by the government. Cubans get a ration book that entitles one person to buy per month: it includes a small bag of coffee, a half-bottle of cooking oil and five pounds of rice. Then that’s it. It doesn’t get better.
It sounds nice to have the government taking care of its people. It’s a debate we have in society here today. We want free everything, especially healthcare and education. But we all know deep inside that’s there’s no such thing as a free lunch. The Cubans pay for it in other way. There’s an old saying: “Capitalism is the unequal distribution of wealth – but socialism is the equal distribution of poverty.”
Despite having their basic needs covered there’s no lack of critics for the Cuban regime. There’s lack of freedom of speech and liberty. Many Cubans are in jail for opposing the regime. A lot of Cubans managed to leave in the 80s to pursue a better life in America or elsewhere. Cubans are generally not allowed to leave the island, and from what I’ve seen, they are basically second-rate citizens in their own country — the tourists get the best of everything. The best beaches, food, treatments…That’s kind of ironic because the revolution was based on the idea of fighting exploitation and injustice.
Right now Cuba remains a country of extremes. Proud locals make much of the fact that their health services and education system is extraordinarily good. But their doctors and teachers often moonlight as tour guides or taxi drivers because they need the money. Everyone is hustling for cash. A taxi driver can make 5 to 10 times the monthly government wage. That’s how you improve your quality of life.
Cuba the Survivor
Cuba is a survivor. It just won’t die. It’s not strong, but it’s hanging on. We have seen countless examples of countries that have turned to communism/socialism thinking they are helping the people. We now have a century of data, starting with the Bolshevik Revolution in 1917. The conclusion is clear: A centrally planned economy has killed, hurt, and destroyed the quality of lives of millions.
After the collapse of the Soviet Union, pundits expected Cuba to be the next domino to fall. But it didn’t. Cuba managed to survive, thanks mostly to a shift to tourism. Then Venezuela came along and Cuba became a dependent on the oil rich country. Now Venezuela is in even worse shape than Cuba. We are currently living the real-time the fall of Venezuela. If getting toilet paper is a luxury, then you have serious questions to ask your leaders. At the moment Cuba is surviving the loss of its main supporter. Now the communist regime can no longer rely on the generosity of its allies. Cuba’s favorite economic stratagem—extracting subsidies from left-wing allies—has had its day.
Market Reforms
Bound by a socialist straitjacket, Cuba produces little else that other countries or its own people want to buy. Farming, for example, is constrained by the absence of markets for land, machinery and other inputs, by government-set prices, which are often below the market price, and by bad transport. Cuba imports 80% of its food. Paying for it is becoming harder. What appears in shops often depends on which of Cuba’s suppliers are willing to wait for payment.
Cuba has started to experiment with capitalism. The government gradually loosened its tight restrictions on foreign travel and also began allowing some private economic activity among its citizens. It has about 600,000 cuentapropistas (self-employed workers), including restaurateurs, hoteliers and so on. But the government mistrusts them. Their prosperity provokes envy among poorer Cubans. Their independent-mindedness could one day become dissent. Raúl Castro, the country’s former president, railed against “illegalities and other irregularities”, including tax evasion, committed by cuentapropistas. He did not admit that kooky government restrictions make them inevitable.
The government should make things easier for entrepreneurs. Cuba doesn’t produce anything (other than doctors, sugar, rhum, cigars). They need to open its markets so entrepreneurs need to import the input they need.
Another bigger step would be a reform of Cuba’s dual-currency system, which makes state-owned firms uncompetitive, keeps salaries in the state sector at miserable levels and distorts prices throughout the economy. The dual-currency system is one the most confusing aspects of travelling to Cuba is figuring out what currency is used in Cuba, and what to bring. Cuban pesos circulate alongside “convertible pesos” (CUC), which are worth about a dollar. Although for individuals (including tourists) the exchange rate between Cuban pesos and CUC is 24 to one, for state-owned enterprises and other public bodies it is one to one. For those entities, which account for the bulk of the economy, the Cuban peso is thus grossly overvalued. This delivers a massive subsidy to importers and punishes exporters. A devaluation of the Cuban peso for state firms is necessary for the economy to function properly. But it would bankrupt many, throw people out of work and spark inflation. Countries attempting such a devaluation usually look for outside help. But, because of American opposition, Cuba cannot join the IMF or World Bank, among the main sources of aid.
Cuba suffers from a capital allocation problem. There’s no price signal in the economy. My barista was a doctor. My cab driver was a lawyer. The people and resources are not being used in their best capacity.
In an ironic twist of history, Guevara owes his posthumous pop culture success to old fashioned property rights and the pursuit of profit.
Failed Experiment but…
The Cuban social experiment is a massive fail economically (almost bankrupt, no productivity), politically (one party system, totalitarian), and socially (the best people left, are jailed or died). But they did get some things right. Cuba has massively invested in their human capital (I’m sure they hate that term). Their healthcare system is one of the top in the world. Cuba produces a lot of doctors and many of them are in disaster areas (e.g. ebola). Its workforce is highly educated. A culture that appropriates art and education above consumer culture can’t be all bad.
Yes Cuba is a poor country by most measures. Like I said, that statement is, in a way, very misleading. Poor though they are, the Cuban people don’t suffer a lot of the same deprivations found in other poor countries.
Cuba also doesn’t suffer from the big problems that plague our society. I know this is a generalization but there’s no drug problem, homeless people, crime, cops killing minorities, or mass shooting. I’m not even sure if they know what prescription drugs are. We have a high level of dropout rate and unfortunately we have a lot of uneducated people in a society. The literacy rate in Cuba is effectively 100%, according to UNESCO. These are not the conditions that would be found in your typical poor country.
Then again, good luck finding the new paint that 99% of the buildings desperately need.
Conclusion
Cuba is a beautiful country filled with many friendly people, who have lived in poverty and deprivation for decades. Socialism in its purest form simply didn’t work.
The government fights wealth, not poverty. There’s a slight difference. When you are fighting wealth, you are keeping everybody poor. When you are fighting poverty, you are trying to make everyone better off.
The U.S. also needs to improve relations with Cuba. How can the U.S. have a country that is 90 miles off their shore their enemy? That is crazy. This opens the door to Russia and China. The U.S. needs all the Caribbean to be allies and friends. There is no doubt in my mind that Cubans are deprived of essential freedoms, but I don’t that the U.S. policy of isolation is an effective way to bring about change. I believe that the best way to promote change in Cuba is by empowering the Cuban people. Helping to keep them poor and isolated only helps the Communism party to maintain control.
Cuba is a special place that will hopefully keep its traditions and spirit intact as it moves from its time-capsule past into the present.
Article by Brian Langis
