Entrepreneurship in Cuba: Uncertainty, Transaction Costs, and Stifled Potential

• Note: The names of the Cuban entrepreneurs and their businesses described below have been changed to protect the identities of these individuals.

“Don’t bother trying to decipher this place. We’re still trying to figure it out ourselves.”

I encountered variations of this sentiment from Cuban entrepreneurs during my March 2024 visit to Havana. Accompanying me was my esteemed colleague from The Citadel, William Trumbull, who designed our comparative systems course, The Cuban Economy. Together, we led a group of student cadets to Havana for a spring break expedition that culminated a semester spent analyzing socialist and capitalist economic frameworks. It was time to witness the practical realities for ourselves.

Aside from my fleeting stint as a relief pitcher in a pickup baseball game in the picturesque Viñales Province, the highlight of our journey came from engaging with the stories of Cuban entrepreneurs. This relatively new breed of businessperson emerged due to the government’s hesitant concessions over the years, made in the face of ongoing economic turmoil. Remarkably, these entrepreneurs now constitute about a third of Cuba’s economy. Despite grappling with significant policy unpredictability and exceptionally high transaction costs, they display remarkable resilience in establishing and managing their businesses. Each entrepreneur we met faced daunting opportunity costs, as they could easily find work abroad (many already have), earning significantly more than they do at home. One even returned to Cuba after years in New York City, a testament to their commitment to forging a new entrepreneurial class.

The Illusion of Economic Transition

At its core, Cuba remains a centrally-planned economy, characterized by autocratic, top-down decision-making in economic matters. Yet, you might be forgiven for thinking otherwise while dining in one of Havana’s over a thousand paladares (privately-owned restaurants). Perched atop Restaurante Yarini in Havana’s San Isidro neighborhood, one could easily mistake the scene for Miami—until casting a glance over the edge to behold the dilapidated buildings that stretch as far as the eye can see. This slight semblance of privatization is a result of sporadic market-oriented reforms introduced by the Communist Party in reaction to economic crises. Even with the private sector experiencing noticeable growth, fundamental economic questions—what to produce, how to produce it, who benefits, and how income is distributed—are still largely dictated by the Communist Party’s central planning.

Since the 1959 Cuban Revolution, the Communist Party has enforced a planned socialist economy modeled after the Soviet Union, where private entrepreneurship was not only absent but actively vilified. All resources—capital, land, and natural assets—were state-owned, leaving factories, farms, and shops under meticulous directives about what to produce, how to sell it, where to source materials, and what prices to adhere to.

After the Soviet Union’s collapse and the ensuing economic crisis of the early 1990s, Cuba implemented reforms that included legalizing self-employment in approximately 157 specified occupations, with some roles being oddly precise, such as “party clown” and “cigarette lighter refiller.” They also legalized foreign currency and investment (Morgenstern and Perez-Lopez 2019). However, these reforms came with major caveats, signaling the government’s willingness to retract concessions at a moment’s notice. For instance, at one point, the government halted the issuance of business licenses in a quarter of the legalized self-employment sectors (Henken and Vignoli 2015). Economist Luis Locay posits that these reforms primarily serve the regime’s survival rather than a genuine transition to a market economy, stating, “I do not believe we are witnessing a child who is starting to crawl and will eventually, after many falls and scrapes, learn to walk” (Locay 1995).

The trend of gradual reform continued into the 2000s, marked by an expansion of self-employment licenses (as part of “The Guidelines” approved in April 2011) and the establishment of private “micro, small, and medium enterprises” in July 2021, a direct response to anti-regime protests (The Economist 2021). In 2019, the Party shifted from a list of permitted business types to one of banned activities (Torres 2024). The approximately 125 forbidden activities predominantly involve highly educated fields such as medicine, engineering, education, and media, thus ensuring the state maintains its monopoly as a key mechanism of political control. The restrictions on these professions severely impact many of Cuba’s most talented individuals, creating a set of perverse incentives.

Profiles of Cuban Entrepreneurship: Business #1

“The reasoning behind it never aligns, so we just navigate around it,” muses Daniel Alvarez, a professor turned entrepreneur. “[The centralized economic model] is utterly blind to spotting market needs… it’s impossible to establish incentives that provide cues for entrepreneurs to act.” Despite his Ph.D., Daniel’s salary as a professor barely exceeds fifty dollars a month. His situation exemplifies how those in state-controlled positions, even highly educated professionals, earn far less than lower-skilled workers in permitted private enterprises (Augustin and Semple 2021). This paradox, which former Cuban President Raul Castro characterized as “the unjust inverted pyramid,” compels highly educated individuals to seek jobs for which they are overqualified or to seek opportunities abroad. My colleague Bill Trumbull observes that in Havana, he often suspects that the baristas serving his espresso are, in fact, professors.

During the initial COVID lockdown, Daniel and two fellow professors identified a gap in the market for convenient, durable, and healthy foods devoid of chemicals and added sugars. This realization led them to establish Business #1, Cuba’s first company dedicated to producing and exporting a fruit-based product. As we spoke, Daniel pondered, “How is it possible that in a country abundant with sweet fruit, no one has explored this before?” Their initial offerings gained traction online, culminating in a substantial order from an international client for 10,000 packages (IPS Cuba 2024). Among their innovative products was a unique ingredient designed for cocktails, illustrating the kind of market discovery that central planning consistently overlooks.

The journey from concept to production spanned 14 months—a remarkable feat considering the considerable uncertainty surrounding government policy on private enterprise. They initiated their venture during the early days of COVID, a full year before small-to-medium enterprises were legalized. While self-employment was technically allowed, hiring outsiders remained illegal, leading to creative interpretations of “family” in hiring practices. As Daniel wittily remarked, “Oh, my cousin from Santiago, of course!” The formal recognition of private enterprise in 2021 allowed unrestricted hiring, resulting in Cuba’s economy leaping from zero to over 10,000 enterprises practically overnight. Today, Business #1 employs over 25 individuals, with entry-level wages surpassing a university professor’s salary.

However, Daniel grapples with substantial constraints due to the unpredictable nature of state policy toward private enterprise. The pattern of sporadic reforms often gives way to new restrictions that curtail private sector growth, part of the government’s strategy to regulate entrepreneurial development. He operates with low visibility, using an unmarked delivery truck: “If I see 100 private trucks with ads, I’ll be sure to stay under the radar.”

Access to financing is another major hurdle, particularly for scaling the business. The inability to open a U.S. bank account or secure loans from American banks is a recurring theme among Cuban entrepreneurs. To circumvent this, Daniel procured necessary equipment during a visit to the United States, routing it through Canada to Cuba. Initial funding materialized through a chance meeting with a European businessperson visiting Cuba, who agreed to lend money after hearing Daniel’s pitch. Unfortunately, Daniel’s expectations of an exchange rate of 60 Cuban Pesos to 1 USD were dashed when the economic crisis pushed the rate above 200 Pesos to 1 USD, exacerbating his repayment burden. Additional funding came through imaginative arrangements with friends studying abroad who could tap into student loans, with repayments occurring through family remittances. The regime’s insistence on shutting off capital markets is clearly inflicting real harm, as evidenced by these desperate yet ultimately futile endeavors.

Profiles of Cuban Entrepreneurship: Business #2

Luca Marino co-founded Business #2, a software development firm, after spotting an arbitrage opportunity: selling high-skill software services to international firms at rates lower than the prevailing market prices yet significantly above the $20 monthly wage offered by the Cuban state. Initially operating as “autonomous workers” licensed as “computer operators,” Business #2 has now grown to employ over 200 individuals, generating monthly revenues that exceed $150,000—more than the annual earnings of Cuba’s largest state-owned software entity employing thousands. Luca recounted how a Cuban tax official was taken aback upon realizing that their revenue was monthly, not yearly. “He dropped his pen,” Luca said.

To navigate international financial transactions, given U.S. banking restrictions, Business #2 devised a convoluted structure: clients pay their U.S. shell company, which then contracts a Spanish shell company, which subsequently subcontracts to the Cuban firm. This intricate workaround exemplifies the burdensome transaction costs that Cuban entrepreneurs must overcome to engage in international markets.

While much of Cuba’s privatization is concentrated in lower-skilled sectors, Business #2 stands out as one of the few firms specializing in higher-skilled services. They face substantial challenges in retaining talent, often offering competitive salaries by Cuban standards to dissuade employees from seeking opportunities with U.S. or European firms. Despite these efforts, they lost 20 workers to emigration in 2023 alone, highlighting the regime-induced brain drain that creates artificial barriers to Cuba’s burgeoning entrepreneurial landscape.

Profiles of Cuban Entrepreneurship: Business #3

Maria Fernandez co-founded Business #3 with the aim of revitalizing Cuba’s dormant fashion industry. Growing up with limited access to fashion due to internet and media restrictions, Maria relied on her foreign friends’ fashion magazines for inspiration. After gaining experience in New York’s fashion scene as a producer and stylist, she returned to Havana, observing an uptick in the availability of restaurants, bars, and Airbnb options. Partnering with two college friends, she sought to tap a niche market: producing high-quality, thoughtfully designed Cuban-made clothing. Their mission was to create linen products that were locally crafted and appealing—qualities that had, until then, been found separately but rarely in unison within Havana’s boutiques.

Initially registered as “seamstresses” (one of the permitted occupations), they scoured Old Havana door-to-door until they stumbled upon a dilapidated building dating back to the 1890s. Maria recounts their early ingenuity: although architectural services were prohibited, individuals would offer “party planning” services that actually entailed restoring buildings. Once fully renovated, they opened in 2018, with Maria and her partners handling every aspect from design to marketing. This limited initial division of labor yielded an unexpected advantage: customers could observe the clothing being crafted, enhancing the shopping experience. As Maria described, “It was akin to piecing together a puzzle, trying different elements to discover the right fit. We had scant resources, as the business model we aspired to had no precedent in Cuba.”

Institutional Support: The Missing Link

The entrepreneurs we encountered during our brief sojourn in Cuba exhibited extraordinary resilience and determination. They spoke of evolving attitudes toward private enterprise, with Daniel remarking, “For generations, people were taught that the private sector is evil. But now, they know entrepreneurs, often family or long-time friends, who defy that notion.” Fashion entrepreneur Lucía Cabrera (founder of Business #4, a boutique fashion line in Havana) echoed this sentiment: “The shift in mindset is monumental. We’re moving away from the idea that money and profits are inherently bad, and that the private sector is evil.”

However, good ideas require robust institutional frameworks. As Peter Boettke aptly points out, “Without the three P’s—property rights, market prices, and profit/loss signals—society lacks the incentives, information, and innovation necessary for economic development” (Boettke 2013). The importance of institutions cannot be overstated. One cannot expect economic growth to occur through half-hearted commitments to institutional reform that are frequently rescinded.

An apt analogy comes from Marshall Goldman’s insights on Perestroika in the Concise Encyclopedia of Economics. Transitioning from planned to market systems resembles reforestation rather than deforestation. “If sufficient force is applied, transitioning to central planning is relatively straightforward, albeit destructive. The reverse, however, is far more complex. Planting a few trees doesn’t create a forest; a forest comprises an entire ecological system” (Goldman 2008). Similarly, allowing a handful of private stores to operate does not equate to establishing a market.

Cuba’s incremental reforms have amounted to sporadically planting a few trees without regard for the ecological framework necessary for a thriving forest. This approach restricts the comprehensive functioning of intricate, interconnected, decentralized economic processes—elements that the Party finds challenging to control. Instead, the state’s strategy of permitting limited private market activity while actively curtailing growth presents a façade of progress that leaves citizens yearning for genuine economic freedom.

My journey with Bill Trumbull reinforced a pivotal realization: should authentic economic liberalization ever take root in Cuba (a prospect that appears unlikely in the immediate future), a reservoir of entrepreneurial talent awaits institutional backing. The term “Entrepreneur” was one Lucía Cabrera does not recall hearing during her upbringing, and if it was mentioned, it certainly wasn’t in a positive light. This narrative is shifting, as she concluded, “We are paving a path, and others will follow.”

Footnotes

[1] Morgenstern, S. & Perez-Lopez, J. (2019). Models of Economic Reform and Cuba’s “Updating” of its Model. University of Pittsburgh Press. PDF file.

[2] Henken, T. A., & Vignoli, G. (2015). Enterprising CUBA: Citizen empowerment, state abandonment, or US Business opportunity. AU-SSRC Implications of Normalization: Scholarly Perspectives on US-Cuban Relations.

[3] Locay, L. (1995). Institutional requirements for successful market reforms. ASCE Proceedings.

[4] The Economist. (2021, August 12). Cuba’s government approves small and medium-sized enterprises.

[5] Torres, N. (2023). Cuba’s private sector boom. Miami Herald.

[6] Augustin, E., & Semple, K. (2021, February 11). Cuba expands private enterprise. The New York Times.

[7] IPS Cuba. (2024). Private enterprise drives export of dehydrated foods in Cuba.

[8] Boettke, P. (2013). ABCT: Providing the Missing Gap. Coordination Problem.

[9] Goldman, M. (2008). Perestroika. The Concise Encyclopedia of Economics.