Socialism, Not The Embargo, Explains Nearly All Of Cuba’s Poverty

Authored by Vincent Geloso via TheDailyEconomy.org,

Every year, since 1992, the UN General Assembly votes on a resolution brought forth by Cuba’s government regarding the need to end the US embargo. Each time the resolution is brought, Cuba’s government attributes the country’s economic hardships — such as shortages, rationing, and limited access to goods — to the long-standing US embargo, which it frames as a form of “economic warfare.” In its 2023 estimate, Cuba claimed the embargo has costits economy a total of $1.34 trillion, adding roughly $13 million in losses each day over the past year. This is an enormous number — and just as enormous a pile of rubbish.

The Cuban government attributes the figure to lost export revenues, trade reallocation costs, and disruptions in production and services. While these categories may sound reasonable at first glance, the regime assumes that all such disruptions are caused by the embargo, not by its own dysfunctional socialist policies. To top it off, the government even attributes emigration and talent loss — 4 percent of the total cost — to the embargo, as if decades of central planning and political repression had nothing to do with people fleeing the country.

Finally, it assumes that all losses in tourism are due to the embargo and not the nationalization of hotels, bars, and restaurants (in the 1960s) or the tight price controls and rationing (which continue today). Together, these fudged numbers account for 45 percent of the total cost, and that assumes the rest is based on “true” number.

The point of this exercise in statistical deception is to shift blame. 

Cuba used to be one of the richest countries in Latin America. Its living standards — in the 1920s — even matched those of some poorer American states. Globally, Cuba was among the wealthier nations. Today, it lingers near the bottom of international rankings. To deflect blame for the disastrous effects of the socialist policies implemented by Fidel Castro after 1959 — and largely maintained ever since — the regime points to the US embargo. It wasn’t Castro and his successors who slowed Cuba’s growth and impoverished the nation by global standards. No, it was the Americans and their embargo that kept the Revolution from bearing its true fruits.

Calle San Lazaro, Havana. 1956. Wikimedia Commons

The problem is that there is no doubt that embargoes make nations poorer! The US embargo clearly makes Cubans poorer — this is a near consensus. But by how much? As long as that question lingers, Cuba’s government can get always with promoting rubbish studies that serve to legitimize their rule.

Fortunately, there is now a way to disentangle the effects of different factors explaining Cuba’s economic evolution since 1959. Alongside João Pedro Bastos and Jamie Bologna Pavlik, we separated the effect of Cuba’s socialist policies from those of the embargo and those of Soviet aid to the country.

This was possible thanks to two new advances.

• The first was a new series for GDP per capita in Cuba that is consistent over time and which can be matched with Soviet transfers to the country; this way, we can evaluate Cuba with and without transfers.

• The second is a relatively novel method in economics — the synthetic control method, which can be used to estimate the causal effect of an intervention (i.e., a treatment just like in a laboratory experiment). It consists in constructing a weighted combination of control units (here: other countries) that approximates the characteristics of the treated unit before the intervention. For Cuba, the intervention is Fidel Castro’s socialist policies. This “synthetic control” serves as a counterfactual — what would have happened in the absence of the treatment (i.e., Cuba continues with a non-socialist and non-democratic regime as was the case before 1959). The difference between the observed outcomes of the treated unit and its synthetic counterpart after the intervention provides an estimate of the treatment effect.

Combined, this allows us to observe the trajectory of Cuba’s economy net of Soviet transfers but still accounting for the effects of the US embargo. By 1989, our results show that Cuba was approximately 55 percent poorer than it would have been in the absence of both socialism and the embargo. In other words, even before the collapse of Soviet support, the costs of central planning and isolation had already taken a severe toll on Cuban living standards.

So, what about the embargo? After stripping out the Soviet subsidy, we can use trade data to simulate how much trade openness was lost due to the embargo. Trade openness — measured as the ratio of total trade (exports plus imports) to GDP — plummeted after 1960 as Cuba was cut off from its most natural trading partner and was forced to reallocate to less efficient trading partners (European countries, Soviet bloc countries, other developing nations). Simply put, Cuba was forced into inefficient trade relationships. This, in turn, affected productivity.

By reapplying the synthetic control method using trade data, we can construct a counterfactual level of trade openness in the absence of the embargo. The resulting gap provides a measure of lost openness attributable to the embargo, which can then be converted into a cost figure by using standard estimates of the growth effects of trade openness. This approach yields an estimate of the economic cost of the embargo independent of domestic policies.

So how big a deal is the embargo? At worst, it accounts for about 10 percent of the economic gap attributable to the combination of the Revolution and the embargo; at best, it explains less than 3 percent. In other words, yes — the embargo has made Cubans poorer, and it may even have helped the regime endure longer by providing a convenient scapegoat. But it simply doesn’t explain much. The true source of Cuba’s decline is the regime’s own policies. These policies placed the country on a trajectory that dragged it from the top tier of global rankings to the bottom.

Next year, when yet another resolution condemning the embargo is tabled before the UN General Assembly, let us hope at least one journalist will point out the absurdity of the regime’s estimates. Let us some representative in the Assembly will state what truly needs to be said: the embargo may be unwise, but the primary cause of Cuba’s poverty is the repressive socialist regime that has extinguished the economic freedom of its people.