Cuba Libre

The Cuba Libre is a cocktail that mixes Coca-Cola and Bacardi Rum—popularized in the 1950s, it is part of the romantic appeal of Cuba that includes Ernest Hemingway, the Cha-Cha, Mambo, palm trees, tropical climes, independence uprisings, and revolutions. That you can find neither Coke nor Bacardi in Cuba these days is the springboard for some reflections relevant to business leaders.

I visited Havana over the New Year’s break as part of the people-to-people program and found that Cubans there were warm and welcoming. Hand-rolled cigars are easy to buy. And the Caribbean in January beats the weather prevailing over most of North America. But the cultural romance that might draw visitors to Cuba wilts under the realization that Cuba is not very different from other emerging economies: edifices and infrastructure have grown dilapidated; begging is visible; the government runs everything except for tourist hotels and a few paladares, privately-owned restaurants; artists and intellectuals talk optimistically about a liberalizing trend and yet acknowledge that Fidel Castro’s famous dictum remains the rule: “Within the Revolution, everything; outside the Revolution, nothing”—criticism or social commentary that is outside the Party Line is prohibited. Che Guevara whose charismatic visage can be seen everywhere, has been dead for 46 years. Cuba seems like a country with neither excitement nor prosperity, a country that lost its mojo.

A typical metric of wealth or prosperity of a country is gross domestic product per capita. Based on the most recent data, Cuba ranks 112 out of 228 countries listed in the CIA Factbook. As the following table shows, Cuba does not particularly stand out in its region.

At $9,900 GDP/capita, Cuba leads eight Central American nations plus Mexico, who average $8,638 GDP/capita. And it leads the average, $8,680, of five other socialist nations who belong, with Cuba, to ALBA, the Bolivarian Alternative for the Americas (consisting of Cuba, Venezuela, Bolivia, Ecuador, Nicaragua, and Dominica). Compared to these benchmarks, Cuba seems to be performing on par with other developing economies in the region. On the other hand, Cuba lags by about half the average of 20 other Caribbean island entities ($18,010). ((If you exclude two tax havens (Cayman Islands and British Virgin Islands) from the sample, the other 18 average $15,439.)) Regardless of which benchmark you choose, Cuba is not an exemplar of economic development. In the face of a command economy ostensibly devoted to the welfare of the Cuban people, why cannot Cuba deliver appreciably more prosperity than its neighbors?

In reply, the tourist hears two narratives. The first is on open display in Havana; the second muttered sotto voce.

The first narrative points to the U.S. trade embargo (el bloqueo) imposed in 1962. It is alleged that the inability to order replacement parts, buy new technology, or simply enjoy the benefits of free trade have stifled the growth of the Cuban economy. Cuba gets none of the huge tourism revenue from those massive cruise ships that drop anchor everywhere else in the region. The party line is that the U.S. embargo is to blame for Cuba’s ills. Sad to say, the U.S. does have a longish history of intervention in Cuba; but it is more accurate to say that by choice or circumstances, Cuba has found itself at the mercy not only of the U.S., but also of Spain, Britain, and the Soviet Union—with a history like that, a victim mentality was bound to grow.

The U.S. embargo was motivated by a desire to discipline Cuba for violations of international law and humanitarian norms. Expropriation without compensation, incarceration for civil dissent, and executions of political opponents initially turned the international community against the Revolution. Today, the community of Cuban exiles continues to pursue claims against the Cuban government.

The embargo seriously disrupted the Cuban economy in the early 1960s—until that time, the U.S. had been the major trading partner of the country. The suspension of trade, particularly in sugar, triggered an economic crisis that was partly resolved when the Soviet Union agreed to buy Cuba’s sugar.

It is not clear that the embargo is having much economic impact on Cuba today. Generally, trade embargos are rather crude instruments of government policy. The current embargos against Iran and North Korea are properly motivated by arms proliferation concerns that many countries can stand behind. But Cuba has not been a direct security concern to the U.S. since the Cuban Missile Crisis of 1963 or indirectly since it stopped supporting armed revolution in other countries in the mid-1990s. Apparently, only two countries in the world (U.S. and Israel) openly support the embargo any longer, which leaves some 200 other countries in the world with which Cuba can trade. Sure, you see some 1950s-era Detroit cars on the road in Havana, but I saw vastly more modern Fiats, Toyotas, and Renaults. Americans are few and far between, but my tourist hotel was teeming with Germans, Frenchmen, and Spaniards. Technology (cellphones and WiFi) seemed amply available to tourists (on the government’s terms). The Netherlands and Canada are Cuba’s first and second-largest trade partners. The issue is not whether the U.S. trade embargo is a constraint (it doesn’t seem to be), but whether Cuba can generate enough hard currency to buy what it wants on world markets.

This brings us to the second narrative: Socialism hasn’t worked very well for Cuba. Fidel Castro argued that the Revolution wasn’t about wealth creation or consumerism, but about social justice. Accordingly, he pursued programs of land redistribution, big emphasis on health care and literacy, expropriation of businesses, minimum wage legislation, rule of enterprises by labor unions, suspension of property rights, and imposition of central planning. The evidence is that the social impact was immediate and significant: a higher standard of living for the broad mass of the population, including virtually 100% literacy and universal health care.

But Castro’s Revolution produced a one-party state that suppresses freedom of expression, hates capitalism, runs a centrally-planned economy, and at times has sought to export revolution elsewhere. Notable was Castro’s inflexible devotion to an ideology. While other emerging economies prospered under a mixed-economy model, Castro continued to suppress markets, private incentives, and property rights. Fidel Castro famously said, “I find capitalism repugnant. It is filthy, it is gross, it is alienating… because it causes war, hypocrisy and competition.” Um…with an attitude like that, it’s not hard to understand why Cuba is not swarming with entrepreneurs, investors, and risk capital.

Not long after the Revolution, the professionals who ran the enterprises left Cuba; untrained revolutionary leaders stepped in. At one point, Cuba’s Central Banker was Che Guevara, an economic neophyte. The result was inefficiency, under-investment, cronyism, growing bureaucracy, food rationing, a dependence on subsidies from the Soviet Union, and periodic waves of corruption. Foreign investors seeking to do business in Cuba have complained about the absence of property rights and sanctity of contracts; doing business there requires numerous government approvals, which breed delay, indecision, and uncertainty.

In the late 1950s, Cuba’s GDP was about equal to Italy and larger than Japan. In the intervening 50 years, a host of reasons might explain the sharp divergence in economic performance between Cuba on one hand and Italy and Japan on the other. An important book, Why Nations Fail, by Acemoglu and Robinson (see my review last month) offers a perspective relevant to Cuba: growth in economic welfare of a country is associated with legal and economic institutions including democratic representation, property rights, independent judiciary, and so on. Two books on Cuba offer some evidence to support the sense that the absence of these institutions significantly explains Cuba’s torpor: Tom Gjelten, Bacardi and the Long Fight for Cuba, and Julia E Sweig, Cuba: What Everyone Needs to Know; I recommend both.

Should the U.S. sustain its current embargo of Cuba? It is not hard to sympathize with the Cuban exiles who lost assets and loved ones in the Revolution—they seek justice, which has been slow in coming. But the embargo warrants careful reconsideration. It certainly hasn’t produced regime change; but it has produced a resentful Cuban population and excuse #1 for the underperformance of the Cuban economy. By some estimates, U.S. producers forego about $2 billion in potential annual trade with Cuba. Clearly, Castro committed numerous sins against people and property in the Revolution of 1959, but these seem more likely to be resolved in world courts than with the blunt instrument of embargo.

The leadership lesson here has to do with how you persuade a population about the efficacy of one economic/political system versus another. Harvard Professor Joseph Nye uses the phrase, “soft power,” by which he means moral suasion, leading by example, and living consistently with your values. Mainstream and social media actively promote soft power. In contrast, “hard power,” refers to military force, financial payments, and embargos. Hard power is coercive; soft power is attractive and co-optive. Having gone down the path of hard power with respect to Cuba, is it possible for the United States to revert to soft power?

Of course, one can direct a similar question to Fidel Castro as well. Is the “hard power” of the command economy the best way to build productivity and economic prosperity? Is coercion, the threat of incarceration, or exile effective in building creativity, work ethic, or high performance? Simply paying people to perform tasks or commanding them to take action (a hard power approach) doesn’t gain high performance results like enlisting them behind a vision, gaining commitment to the values of a team, making meaning out of one’s work (a soft power approach).

Castro said, “They talk about the failure of socialism but where is the success of capitalism in Africa, Asia and Latin America?” The table of GDP/Capita speaks volumes in reply—numerous mixed- and market-economy countries have vaulted ahead of Cuba. Cuba’s economic model has not delivered the prosperity experienced by numerous emerging economies—yet Castro will still point to benighted social conditions in many of these countries.

The challenge for business leaders is to help capitalism serve the interests of wealth creation and social advancement. Darden offers many opportunities for students to explore the possibilities, such as our Initiative for Business in Society (IBiS), research and an innovative course, Markets in Human Hope, clubs and courses in corporate social responsibility, and global business experience programs that build understanding, social awareness, and empathy. Our graduates go on to careers that promote global trade, new product innovation, improved government effectiveness, and social action. And there is always more that can and should be done.

How will the rising generation of business leaders address the joint obligation to create both economic and social value? Ponder that as you sip your next Cuba Libre.