Introduction

The research and analysis shared within this report originate from experiences in Cuba in January 2024. Through site visits, lectures, and individual conversations, a basis of knowledge was formed about the island nation. Upon return, extensive research began to verify learnings and provide numerical evidence to support observations and trends. The research is timely, as most sources are no older than four months unless otherwise warranted.

To understand the future of entrepreneurship in Cuba, we must understand why the topic is of interest. This report provides a background on the complexities of communism and geopolitical economics. Delving into these topics supplies a level of understanding of the reasoning for the current economic crisis Cuba faces. We examine the reemergence of the private sector and explore what is working and what is not. We give three examples of wealth generation that shed light on the paradox of being a communist state, where citizens have differing qualities of life. The report concludes with a theory relating to the future of entrepreneurship in Cuba. 

Current Economic Stat

Dynamic is likely the most apt word to describe the Cuban economy. While change occurs constantly in all world economies, geopolitics affects this Caribbean nation more radically. The Cuban government reports annual inflation at 30%, sourcing the United States embargo as the main factor. According to Alejandro Gil, the Economy Minister, the Cuban economy contracted by 2% in 2023. The outlook is no better. The nation projects to be at a minimum deficit of 18% of GDP at the end of 2024. ("Cuba's private-sector experiment is faltering") While the government blames its current economic crisis on the United States, local policy has left the nation in a compromised position. We will examine both before analyzing the future of entrepreneurship in Cuba.

The Embargo 

The embargo with the United States places tremendous pressure on Cuba. A broad view shows that the U.S. will export goods like meat and produce to Cuba but will not welcome imports. Additionally, they restrict general travel to the nation and have capped specific banking transactions, including restricting remittances to $4,000 annually ("Explainer: U.S. Sanctions on Cuba"). The United States attempts to minimize the amount of currency it injects into its former trading partner's economy. 

When examining the nuanced restrictions of the embargo, we learn how much of a stronghold it has over Cuba. With a wealth of oil in its waters, the country cannot extract and process the energy source as demanded. As shared by Miguel Coyula, an urban planner and professor, the reasoning is that Cuba can only have machinery with up to 10% of American components. This machinery is limited, as the United States manufactures most of the world's crude extraction machinery. Therefore, the volumes needed to sustain demand, let alone serve as an export profit center, cannot be reached. Coyula concluded, "The embargo betrays the credibility of the country." (Coyula)

In the early months of 2024, the effects of this restriction emerged as the country is facing a fuel deficit. Data from Cuba's Office of Statistical Information states that 125,000 barrels per day (bpd) of fuels are required. The fuels needed include electricity production, motor gasoline, and diesel. However, there is a discrepancy in the data. The nation shares that they produce about 40,000 bpd. Documents from LSEG vessel monitoring data and PDVSA, a state-owned company, show that Cuba receives 89,000 bpd from other nations (Venezuela – 56,000; Mexico – 23,000; Various European Nations – 10,000). This would mean that Cuba requires an additional 4,000 barrels per day. News outlet Reuters found this discrepancy, and the Cuban government declined to respond. (Sherwood) 

Adding further insult to Cuba, the United States lifted sanctions against Venezuela's state-owned oil companies in November 2023. This diverts fuel that would otherwise be provided to Cuba to go to the higher-paying United States. ("Cuba's private-sector experiment is faltering") Pairing the reported shortfall with the decline in the Venezuelan supply, the government has increased the price of oil fivefold to reduce demand. (Augustin)

Local Policy 

The fuel deficit is not solely an effect of the embargo. For decades, Cuba has chosen to subsidize fuel prices for its citizens. Before increasing fuel prices by 500%, A liter of petrol went from $0.12 ($0.45 per gallon). Emily Morris, an economist specializing in Caribbean economic development, states that Cuba is "importing most of its oil at world market prices and selling it (for) much less. And so that's costing the government (and) they've got a huge fiscal deficit." (Augustin) Oil prices in Cuba have been over-subsidized, and contingency planning at the local level did not account for outside variables in the global economy. The reason for subsidizing oil, as they had, was because the Cuban people could not afford "world market prices." The average monthly salary for a Cuban is $16. (Augustin) While provoked by the U.S. Embargo, this failure ultimately has Cuban policy to blame.

The harshest shortcomings of Cuba's communist system were felt after the dissolution of the Soviet Union. In the early 1990s, Cuba underwent an economic depression known as "The Special Period." At this time, the Soviet Union ceased financing the Cuban government. (Coyula) The amount of money infused into the economy varied depending on the news source. The documentary "The Cuba Libre Story" shared that the Soviet Union gave Cuba $6M daily, while a UPI article in 1983 stated $11M daily. (Anderson) Regardless of the exact amount, the economy's primary funding source abruptly ended. Jon Alpert, a documentarian, captured video footage of the aftermath of The Special Period in Cuba. Medical supplies at Cuban hospitals were drastically low, which resulted in patients not receiving adequate care. Students were going hungry at school, and grocery stores were empty. In the countryside, crime became rampant, and we saw oxen used for farming being stolen and slaughtered for meat. The images during this time were powerful and damning to the system. However, Coyula shared that, slowly, Cuba adapted and gathered its footing by focusing on the state-run tourism industry and loosening up some of their communist values. Some changes included allowing foreign investment, reopening the real estate market, and allowing dual currency and remittances into the country. (Appendix A)

(R)Evolution of Entrepreneurship

The most significant change following The Special Period was the restoration of the private sector. In 2011, citizens could be self-employed for the first time since the early years following the 1959 revolution. Cubans could choose from a short list of between 85-100 licenses to practice their new career. (Diaz Castellanos) We learned from a consultant, Oniel Diaz Castellanos, and architect, Nancy Benitez, that their professions were "forbidden" in the private sector. So, they both filed their applications for licensure to become "Messengers." Diaz Castellanos rationalizes that "messenger (are) allowed to deliver any product or service that a client requests." He continues, "I am allowed to do A with it (license), but it also allows me to do B." This creative thinking, paired with lax compliance enforcement, allows these entrepreneurs to deliver value while earning wealth in the Cuban economy. (Diaz Castellanos) (Benitez)

An evolution to the entrepreneurial journey occurred in 2021. At this time, Cuba began allowing citizens to incorporate private companies. These small and medium-sized enterprises (SMEs) could employ up to 100 people and currently account for a reported 14% of GDP. However, those within the private sector estimate that this figure reported by the government should likely be much higher. (“Cuba's private-sector experiment is faltering”) 

As of 2024, approximately 10,000 SMEs are active across the country. Diaz Castellanos, who specializes in SME consulting, shared that while 10,000 are legally active, the number is likely closer to 6,000 as companies fail, disagreements occur between partners, and entrepreneurs immigrate to other countries. Even with that reduced number, it still rivals the 2,000 state-controlled companies. Diaz Castellanos is proud to share this fact.  

Entrepreneurship: Individual Successes

Traveling across Cuba, we met with many different SME owners. Most opportunities emerging within this economy align with the tourism industry since the island nation has little wealth. The average Cuban citizen cannot afford many of the offerings that SMEs provide to international tourists. Cuba needs to bring in wealth from other nations to grow its economy. But having a sole reliance on tourism has its setbacks, as self-employed entrepreneurs faced during the COVID-19 pandemic. Highlighted within this section are a few successful stories of entrepreneurship in Cuba.

            Hernandez Family Farm

            The Viñales Valley has a farm owned by the Hernandez family. Like many businesses in Cuba, the farm has diversified its offering to create additional revenue streams. The farm yields tobacco, guava for rum, honey, and coffee beans. However, unlike most businesses, they operate in the public and private sectors. Annually, the farm earns 2500 Cuban Pesos from the Cuban government, roughly equivalent to $100. This portion of the business exists within the public sector. However, the farm can retain 10% of its tobacco and rum and 20% of its honey and coffee. What the farmers do with the remaining supply is up to them. The government even sends back the 10% of rum in bottles, which makes for easy distribution. 

When evaluating the amount of money this family can make, it is easy to see sales add up quickly. Our group of twenty stayed at the farm for about three hours. A photo of a receipt captured the average customer transaction at $190. (Appendix B) Our group likely spent between $3,000-$4,000 during our half-day at the farm. Even taking a conservative estimate that only one group per week our size visits the farm, the Hernandez family would still earn an additional $156,000 - $208,000 annually. This amount is a staggering 1,560 – 2,080 times the amount the government paid them for while providing eight and nine times the yields. If we only examined this one business in a vacuum, our idea of entrepreneurship in Cuba would be skewed. Research has shown that this scenario appears to be an anomaly, but that is not to say that other businesses cannot succeed in Cuba.

            La Rosa de Ortega

            La Rosa de Ortega is an Airbnb located in Havana. The proprietor, Julia Ortega, operated a beautiful property that offered rooms, dining, a bar, and spa services. She is active on Revolico, a Craigslist-like website used to find jobseekers for the private sector. She employs 23 people and will soon hire a 24th- a medical doctor training as a masseuse for additional income. Unlike the Hernandez family farm, Julia needs multiple licenses for each revenue stream and is learning business compliance requirements in real-time.   

When asked how she determines the pricing for her rooms at the bed and breakfast, Julia humbly admitted, "I don't know how to price. We try our best and often test different prices." This uncertainty is rather logical for a few reasons. First, testing market prices is complex, especially with few data inputs. More importantly, however, this speaks to a point made by Diaz Castellanos, "an entire generation of people do not know what money is." Business education was never taught in schools, as the government solely provided for the needs of the people. While it is not inherently an issue to not understand currency or business, it becomes a problem when an individual must grapple with the effects of a government not being able to support them and their families with the necessities of life. Julia's lack of business acumen is a systemic issue that spans across the emerging Cuban entrepreneurship landscape. 

Monitoring La Rosa de Ortega's Airbnb listing from January 5th, 2024, to March 9th, 2024, the pricing ranged from $70 - $89 per night. (Ortega) Assuming two rentable rooms are available on Airbnb, with an average nightly stay of $80 and full occupancy for only half of the year, this proprietor will earn $29,200 for one of her revenue streams. Including taxes, which she estimates to be around 50% when factoring in all licenses, her net income is $14,600 before paying her sizable staff. While this amount may seem low, let us remember that the average Cuban citizen makes only $192 annually. The medical doctor training to be a masseuse makes around that amount. While this business model is less lucrative than that of the Hernandez family farm, Julia still manages to build significant wealth. 

            Dador

           Dador is a fashion and lifestyle brand located in Havana. Lauren Fajardo, Founder and Creative Director, shared some complexities surrounding her business and the overall uphill climb for many Cuban entrepreneurs. The predominant good sold within her stores is clothing. Unlike the other two businesses we examined, significant planning is involved with sourcing materials for delivering a final product. The fabrics that Lauren uses in her fashion come from abroad. Whenever she travels, she returns to Havana with her checked bags full of resources that she will use to create the clothing her business sells. 

She explained that it is difficult for Cubans, without means, to form their own business in the country. Successful Cuban entrepreneurs are fortunate enough to have family and friends outside the country. Remittances prop up the SME because of the strength of the foreign currency compared to that of the Cuban Peso. This currency from abroad appears to be a recurring theme for Cuba as it is reminiscent of how the Soviet Union provided millions of dollars daily to Cuba and its people from the 1960s - 1990. 

Beyond needing resources from abroad and the financial means to travel, Lauren expressed other concerns facing her and her business. Planning is a challenging undertaking. Her materials are limited, so she and her team must be efficient with what they produce. Determining what sizes to put in the store is difficult. Most of her customers are foreigners who come in different sizes. Lauren must have the appropriate size when the customer arrives because they cannot buy Dador's clothing online. Lauren offers to make custom clothing and ship it abroad, but that is a significant request for the customer, who typically seeks an instant transaction. 

A fundamental struggle to consider is that Lauren had to learn how to use accounting software to operate her business by Cuban law. She looked visibly distraught when she spoke about bookkeeping, which further shows the negative impact of not learning business and accounting principles in school. Running a business is an uphill battle for new entrepreneurs. 

The clothing sold ranged from $65 for women's shirts to $140 for dresses. It is difficult to understand Dador's profitability, but what was very transparent was that this business operates in a highly volatile environment. The Hernandez family farm has the luxury of benefiting from guaranteed revenues, albeit only $100 annually. If tourism ceased, at minimum, they would live like the average Cuban family- this does not factor in any savings they have accumulated over the years. Julia's AirBnB faces more risk than the Hernandez farm. She relies on tourists to locate her business and stay on her property. She admitted that most Cubans cannot afford La Rosa de Ortega. Dador operates at the highest level of volatility. Not only is Lauren reliant on tourists to find her store, but she must also have the correct clothing in stock to transact business. She relies on securing materials from abroad and needs to plan appropriately for the customers entering the store. A theme emerges that not all business owners have the same private-sector experience. Financial gains, business complexity, and greater risk and stress are all differentiators in their quality of life.

Entrepreneurship: National Complexities

While the private sector works for some, it does not lift the entire Cuban economy. A fortunate few emerge and can live a comfortable to lavish life while in a community that has a significantly lower quality of living. We are seeing movement across sectors, which is leading to an imbalance of talent and resources. The attractiveness of the private sector is so strong that many public sector jobs need to be fulfilled. To add to the complexity, Cubans are leaving the country in droves.

The Economist stated that in 2022 and 2023, more than 4% of the Cuban population migrated to the United States 425,000, and Mexico 36,000 alone. An additional undisclosed number of Cubans left for other destinations, including Russia. Some 17,000 teachers were among those who likely left as they are reported as "missing" from the Cuban Ministry of Education. ("Cuba's private-sector experiment is faltering") 

"You feel impotent because there's no way to convince people to stay," said Elsa Escalona, Director at a school for autistic children. The 72-year-old educator who has given her life to teaching continues, "Some teachers have cried because they haven't wanted to leave, but the economic situation is overwhelming—they feel they need to go." (Augustin) A major concern for the future of Cuba is that its well-educated population is leaving.

While a solution for the imbalance of talent between the sectors has yet to emerge, in January 2024, the Cuban government imposed a new 20% tax on citizens earning monthly wages of $109 or more in the private sector. This tax is a 15% increase to the previous taxes imposed. This action is not an effort to curb the movement to the private sector, as the government has not reported this news to the state media. This information was given directly to the private sector business owners, along with instructions to funnel these wages out of employee checks and to the government. (Gámez) We can see that the communist values of the revolution are breaking down and that the government is attempting to keep the public ignorant of the private sector's successes. At the surface level, this may seem like an attachment to the rhetoric of revolution, or could it be more clandestine?

Conclusion

The great risk of communism is the government's inability to sustain itself and its people. The 1959 revolution undoubtedly succeeded in some respects. Cuba is an incredibly educated nation whose people are generally healthy and have high life expectancies. However, the revolution failed to generate an economic return on its investment in this human capital. The organizational design of Cuba failed. The most talented citizens, those the country invested in, are leaving the country for opportunities in other nations. They will help those nations prosper, and it is because Cuba did not provide the proper incentives or structure for them to stay. (Dominguez) However, I am curious whether a pivot is subtly occurring within Cuba's organizational structure. 

The field of change management conveys that "adaptive," "incremental," or "gradual" change is an effective method to use within any change management process. We've observed the Cuban government suppress the successes of the private sector. They do not acknowledge how they benefit from entrepreneurs' successes. This is likely because of the revolution's propaganda that has embedded itself into society. Admitting issues with the backbone principle that defines the nation is risking embarrassment and could cause chaos among citizens. But can we believe that the government is blind to the opportunity the private sector offers?

Effective change management would require a subtle transition from the current model into a free market system. We see movement towards this system taking place. It began even in Fidel's regime in the 1990s, but that was out of necessity. After emerging from The Special Period, communism continued to ease, and many are slowly accepting capitalism as a best practice. 

The growth of entrepreneurship in the private sector is the surest way for Cuba to secure a prosperous future. For the first time since the early 1960s, we observe various quality of life in the country. This should be alarming for those who are genuine revolutionists. And with a growing free market, the quality of life delta will only grow. But what is worse: An economy with various financial classes? Or an economy with no opportunity? The Cuban government understands the answer to this question and is taking action to balance the public sector with free market capitalism.

Appendix A

Appendix B

Works Cited

Anderson, Jim. "Soviet Aid to Cuba: $11 Million a Day." UPI, 18 Jun. 1983, www.upi.com/Archives/1983/06/18/Soviet-aid-to-Cuba-11-million-a-day/2328424756800/. Accessed 8 Mar. 2024.

Augustin, Ed. "Soaring Petrol Prices in Cuba Are a Cause of Great Concern for Havana Residents." France24, 3 Mar. 2024, www.france24.com/en/americas/20240303-soaring-

petrol-prices-in-cuba-are-a-cause-of-great-concern-for-population. Accessed 8 Mar. 2024.

Benitez, Nancy. "Trinidad: Architectural, Economic, and Infrastructural Point of View." 9 Jan. 2024, Trinidad. Invited Talk.

Coyula, Miguel. "Cuba and Havana's Evolution." 5 Jan. 2024, Quinta De Los Molinos, Havana. Invited Talk.

Cuba and the Cameraman. Directed by Jon Alpert, Netflix, 2017.

The Cuba Libre Story. Directed by Emmanuel Amara, et al., LOOKSfilm, 2016.

"Cuba’s Private-sector Experiment Is Faltering." The Economist, 3 Jan. 2024, www.economist.com/the-americas/2024/01/03/cubas-private-sector-experiment-is-

faltering?utm_medium=cpc.adword.pd&utm_source=google&ppccampaignID=17210591673&ppcadID=&utm_campaign=a.22brand_pmax&utm_content=conversion.direct-

response.anonymous&gad_source=1&gclid=CjwKCAiAi6uvBhADEiwAWiyRdogzU69ngAXyq-IgbkghRL4qto6BigWFQjP51G7Rku88NtNLWHQ2aBoCgVYQAvD_Bw

E&gclsrc=aw.ds. Accessed 2 Mar. 2024.

Diaz Castellanos, Oniel. "Cuba's Private Sector." 6 Jan. 2024, Hostel Hanoi Havana, Havana. Invited Talk.

Dominguez, Jorge. "What You Might Not Know About the Cuban Economy." Harvard Business Review, 17 Aug. 2015, hbr.org/2015/08/what-you-might-not-know-about-the-cuban-economy. Accessed 8 Mar. 2024.

"Explainer: U.S. Sanctions on Cuba." Dow Jones, www.dowjones.com/professional/risk/glossary/sanctions/us-sanctions-cuba/. Accessed 8 Mar. 2024.

Fajardo, Lauren. "Female Entrepreneurship." 4 Jan. 2024, Dador, Havana. Invited Talk.

Gámez, Nora. "As the Economy Craters, the Cuban Government Hits Private-sector Workers with Tax Hike." The Miami Herald, 18 Jan. 2024, www.thedailynewsonline.com/news/as-the-economy-craters-the-cuban-government-hits-private-sector-workers-with-tax-hike/article_38ed78fa-b651-11ee-8934-738eba247d0a.html. Accessed 5 Mar. 2024.

Ortega, Julia. "AirBnB Opportunity in Cuba." 5 Jan. 2024, La Rosa De Ortega, Havana. Invited Talk.

Ortega, Julia. "La Rosa De Ortega." AirBnB, www.airbnb.es/rooms/5704246?source_impression_id=p3_1710083311_c5iqrmn%2FiEcIdc57. Accessed 5 Jan. 2024.

Sherwood, Dave, and Marianna Parraga. "Cuba Import Data Casts Doubt on Official 'fuel Crisis' Explanation." Reuters, 13 Feb. 2024, www.reuters.com/world/americas/cuba-import-data-casts-doubt-official-fuel-crisis-explanation-2024-02-13/. Accessed 3 Mar. 2024.