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.

I heard versions of this refrain repeatedly from Cuban entrepreneurs during my March 2024 visit to Havana. Along with my excellent colleague at the military college, The Citadel, William Trumbull, creator of our comparative systems course, The Cuban Economy, we brought a dozen or so student cadets to Havana over spring break. This was the culminating experience after a semester of comparing socialist and capitalist economic systems and examining the implementation of socialism in Cuba. Next, it was time to see the results for ourselves.

Apart from my brief appearance as a relief pitcher in a pickup baseball game in Cuba’s Viñales Province, the greatest thrill of our trip came in hearing the stories of Cuban entrepreneurs. The entrepreneur is a relatively new type of individual in the country. Reluctant concessions made by the state for private enterprise over recent decades, in response to ongoing economic crisis, explain their presence. These entrepreneurs now comprise one-third of Cuba’s economy. Facing significant policy uncertainty and remarkably high transaction costs, they demonstrate extraordinary perseverance in creating and managing their enterprises. Each entrepreneur profiled in this article faces high opportunity costs, as any could work abroad (some already have) and earn substantially more. One even returned to Cuba after working in New York City for many years. That these entrepreneurs choose to pursue private enterprise in Cuba represents their motivation to form the vanguard of a new entrepreneurial class.

Economic Transition or Socialist Band-Aids?

Cuba remains fundamentally a centrally-planned economy with autocratic, top-down decision-making regarding economic activity. However, one might not get this impression while dining at one of Havana’s 1,000+ paladares (privately-owned restaurants). From the rooftop of Restaurante Yarini in Havana’s San Isidro neighborhood, you’d think you were in Miami—until peering over the ledge to see blocks of crumbling buildings stretching to the horizon. This still modest extent of privatization stems from piecemeal market-oriented reforms enacted by Cuba’s Communist Party in response to economic crises. Despite significant growth in Cuba’s private sector, the basic economic questions—what gets produced, how things get produced, who gets these things, and who gets the resulting income—remain primarily answered by the Communist Party’s central planning.

Following the 1959 Cuban Revolution, the Communist Party implemented a planned socialist economy modeled after the Soviet Union. For decades, private entrepreneurship was completely absent and actively demonized as all non-labor resources (capital, land, natural) were state-owned. All factories, farms, and retail establishments received detailed instructions about what to produce or sell, how to do it, where to send outputs, where to source inputs, and what prices to charge or pay.

After the Soviet Union’s collapse and ensuing economic crisis in the early 1990s, Cuba enacted reforms including legalizing self-employment (in approximately 157 specified occupations, including peculiarly specific roles like “party clown” and “cigarette lighter refiller”) along with legalizing foreign currency and investment (Morgenstern and Perez-Lopez 2019)1. Each reform came with significant provisos, suggesting the government’s readiness to backtrack at any moment. For instance, the government at one point ceased issuing business licenses in one-quarter of the legalized self-employed occupations (Henken and Vignoli 2015)2. Economist Luis Locay argues such reforms primarily aid regime survival rather than transition toward a market economy, writing, “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)3.

This pattern of piecemeal reform continued into the 2000s, including expansion of self-employment licenses (as part of “The Guidelines” approved in April 2011) and, most notably, establishment of private “micro, small, and medium enterprises” in July 2021 (responding to anti-regime protests)(The Economist 2021)4. In 2019, the Party switched from listing allowed business types to listing forbidden activities (Torres 2024)5. The approximately 125 prohibited activities mostly involve highly educated fields like medicine, engineering, education, and media—maintaining the state’s monopoly as a central strategy of political control. That these occupations remain subject to the state’s monopoly directly impacts many of Cuba’s most talented individuals, creating the perverse incentives described below.

Stories of Cuban Entrepreneurship: Business #1

“The why doesn’t ever make sense, so we just work around it,” reflects Daniel Alvarez, a professor and now entrepreneur. “[The centralized economic model] is completely blind to identify market needs… it’s impossible to create incentives that provide signals for entrepreneurs to act.” Despite his Ph.D., Daniel’s professorial earnings amount to under fifty dollars monthly. As one of the activities forbidden to private sector actors and subject to state-controlled wages, this means that despite his Ph.D. (in a highly technical field), his earnings as a professor are minimal. In Cuba, the Spanish verb resolver (meaning, “to resolve”) has come to mean doing what needs to be done to make ends meet, either legally or through the black market. This applies equally to street vendors selling fruit and those with Ph.Ds.

Daniel’s situation exemplifies what former Cuban President Raul Castro termed “the unjust inverted pyramid”—the paradoxical situation whereby Cuba’s best-educated professionals in state-controlled jobs earn considerably less than lower-skilled workers in jobs where private enterprise is permitted (Augustin and Semple 2021)6. These individuals face strong incentives to take jobs they’re significantly overqualified for or emigrate abroad. As my colleague Bill Trumbull notes, in Havana, he assumes the baristas serving his espresso are professors. Our trilingual local guide, for instance, previously worked as an international trade contracts lawyer at the Port of Havana, while our bus driver was trained as a mechanical engineer.

During initial COVID confinement, Daniel and two fellow professors noticed a lack of convenient, durable, healthy foods free of chemicals and added sugars. They founded Business #1 out of this realization, Cuba’s first company producing and exporting a fruit-based product. In our interviews with Daniel, he wondered aloud, “How is it that in this country of such naturally sweet fruit that no one has pursued this before?” Their early offerings gained traction online, eventually leading to a large order from an international client for 10,000 packages (IPS Cuba 2024)7. Among their innovations was introducing a unique product for use in cocktails, demonstrating the kind of market discovery that central planning routinely misses.

From concept to production took 14 months—remarkable given significant regime uncertainty. They started during early COVID, a year before small-to-medium enterprises were legal. While self-employment was permitted, hiring remained illegal except within families. Under these incentives, “family” sizes grew accordingly. As Daniel joked about hiring, “Oh, my cousin from Santiago, of course!” Recognition of private enterprise in 2021 meant unrestricted hiring, and overnight, Cuba’s economy went from zero to more than 10,000 enterprises. Today, Business #1 employs over 25 people, with their lowest level employees earning triple a university professor’s salary in Cuba.

Daniel faces considerable constraints from uncertainty about state policy toward private enterprise. Piecemeal economic reforms have frequently been followed with new restrictions curtailing private enterprise, all part of the state’s effort to control the growth path of private enterprise. He maintains low visibility, operating an unmarked delivery truck: “If I see 100 private trucks with advertising, I will be the 101st.”

Financing presents another major challenge, particularly for scaling the business. The inability to have a U.S. bank account or take loans from a U.S. bank is a persistent theme among Cuban entrepreneurs. Unable to access U.S. banking, Daniel bought the equipment he needed while visiting the United States, shipping it through Canada to Cuba. Initial funding came through a fortuitous relationship with a European businessperson visiting Cuba, who agreed to provide a loan after hearing Daniel’s idea. Daniel took the loan expecting an exchange rate of 60 Cuban Pesos to 1 USD, but economic crisis drove the rate above 200 Pesos to 1 USD, dramatically increasing his repayment burden. Additional funding came through creative arrangements with friends studying abroad who could access student loans, with repayment handled through covering their family remittances. Clearly, the regime’s determination to cut off capital markets is imposing real harm, as evidenced by these valiant but ultimately needless and wasteful efforts.

Stories of Cuban Entrepreneurship: Business #2

Luca Marino co-founded Business #2, a software development company, after recognizing an arbitrage opportunity: selling high-skill software services to international firms for less than prevailing rates but far above Cuban state wages of $20/month. Initially operating without a company name as “autonomous workers” licensed as “computer operators,” Business #2 now employs over 200 people with monthly revenues exceeding $150,000—surpassing the annual earnings of Cuba’s largest state-owned software company employing thousands of workers. Luca shared the story of a Cuban tax official learning that $150,000 was their monthly, not yearly, revenue. “He dropped his pen,” Luca said.

To handle international financial transactions, given U.S. banking restrictions, Business #2 developed a complex structure: clients pay their U.S. shell company, which subcontracts to their Spanish shell company, which then subcontracts to the Cuban company. This elaborate workaround exemplifies the high transaction costs facing Cuban entrepreneurs attempting to participate in international markets.

While much of Cuba’s privatization involves lower-skilled work, Business #2 represents one of few firms specializing in higher-skilled services. They face significant challenges retaining talent, increasingly paying high salaries by Cuban standards to prevent workers from taking jobs with U.S. or European firms. Despite these efforts, they lost 20 workers in 2023 alone to emigration for better opportunities. It’s this kind of regime-induced brain drain that imposes artificial obstacles to Cuba’s naturally emerging entrepreneurship.

Stories of Cuban Entrepreneurship: Business #3

Maria Fernandez co-founded Business #3 out of a desire to resurrect Cuba’s dormant fashion industry. Growing up with limited access to fashion due to restrictions on internet and outside media, Maria relied on visiting foreign friends’ fashion magazines for exposure to trends. After working in New York’s fashion industry as a producer and stylist, she returned to Havana upon noticing increasing availability of restaurants, bars, and Airbnb’s. She partnered with two college friends to explore a niche market opportunity: producing high-quality, thoughtfully designed Cuban-made attire. Their goal became making linen products that were both locally made and desirable—qualities found separately but rarely together in Havana boutiques.

Initially operating under the “seamstress” designation (among permitted occupations), they searched door-to-door in Old Havana before finding an almost collapsing 1890s building. Maria explains their early workarounds: while architectural services were forbidden, individuals offered “party planning” services that actually involved building restoration. After full restoration, they opened in 2018 with Maria and her partners handling every aspect from design to marketing. Their limited initial division of labor created an unexpected benefit: customers could watch their clothes being made, adding value to the experience. As Maria noted, “It was like assembling a puzzle piece by piece, trying out different pieces to find the right fit. We had little to work with, as the business model we aspired to had no precedent in Cuba.”

Ideas in Need of Institutions

The entrepreneurs we met during our short time in Cuba demonstrated remarkable perseverance and spirit. They report shifting attitudes toward private enterprise in Cuba, with Daniel noting, “For generations, people were taught that the private sector is evil. But now people know entrepreneurs that they know from experience not to be evil because they’re family or longtime friends.” Fashion entrepreneur Lucía Cabrera (founder of Business #4, a boutique fashion line in Havana) echoed this: “The change of mindset is huge. We are moving away from talking about money and profits as bad and that the private sector is evil.”

However, good ideas require supporting institutions. As Peter Boettke argues, “If you don’t have the three P’s, you can’t have the three I’s.” (Boettke 2013)8. Without property rights, market prices, and profit/loss signals, a society lacks the incentives, information, and innovation needed for economic development. “Institutions matter”. You can’t partially commit (and subsequently backtrack, and repeat) to institutional liberation and expect economic growth.

A vivid analogy comes to us from Marshall Goldman’s entry on Perestroika9 in the Concise Encyclopedia of Economics. Transitioning from planned to market systems resembles reforestation rather than deforestation. “If enough force is used, the procedure [of transitioning to central planning] is relatively simple, even if it is destructive. Performing the reverse, however, is much more difficult. Planting a few trees does not make a forest. A forest encompasses a whole ecological system of insects, animals, and underbrush. In the same way, allowing a few private stores to open does not make a market.” (Goldman 2008)

Cuba’s piecemeal reforms have amounted to planting a handful of trees every few years with little consideration of the “ecological” necessity of reforestation. To do so would permit the broad scale functioning of highly complex, interconnected, decentralized economic processes—things the Party cannot easily control. Instead, planting a few trees takes the form of permitting private market activity in limited sectors followed by actively curtailing growth once deemed “sufficient.” While this is no substitute for reforestation, the state hopes the trees will suffice for the forest as far as citizens are concerned.

If there is one thing my trip with Bill Trumbull convinced me of, it is this. Should genuine economic liberalization occur in Cuba (a possibility that appears unlikely near-term), there exists a pool of entrepreneurial talent awaiting institutional support. The word “Entrepreneur” was not one Lucía Cabrera recalls hearing growing up, and if mentioned, certainly not positively. This is changing, as she concluded, “We are opening a lane and people 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.