Cuba’s Bustling Black Markets Hold an Important Economic Lesson

Black Markets have always been regarded as networks where buyers and sellers transact goods and services notorious for being morally wrong. Things like hard drugs, illegal prostitution, or guns that are not registered are among the many elements people cite when someone introduces the conversation of black markets to the table. Yet, few have talked deeply about how black markets can function and improve the general well-being of a nation. For this purpose, there is no better starting point than Cuba.

Cuba is known for its apologia to communism and the practice of different policies associated with it. The question of whether Cuba is a communist nation must be left to the discretion of the reader. What can be said, though, is that the country has a government with the universal capacity to dictate prices. In 2019, Cuba imposed a policy of complete price control over the products entrepreneurs and vendors were selling in the market. And although the Cuban regime has been more polite recently in opening specific sectors of the economy (those that do not affect the power of the politicians), the reality is that nothing has changed dramatically.

As many may infer, in an economy where price controls are established, shortages would arise as a response to the inefficient policy passed by the ruler. As Henry Hazlitt put it,

Price—and wage—fixing is always harmful. There is no right way of doing it. There is no right way of doing a wrong thing. There is no fair way of doing something that oughtn’t be done at all. We can’t even define a fair price or a fair profit or a fair wage apart from the market, apart from the state of supply and demand.

Such is the case that recently Cuba had protests over the shortages of food and medicines; this from a country whose main propaganda has been, over the years, the defense of the proletarian from the capitalist and the concern for the social welfare of its people. However, the politicians that rule over the island—primarily the Castro family—are not equipped with the basic economic knowledge to know that if you put a price ceiling on a product, you may create shortages. But what is even more harmful is that by establishing fixed prices, the once functional economy that could allocate resources efficiently stops doing so, and instead, malinvestments appear.

Cubans even like to call this an “internal blockade” as a satiric answer to those who say that the leading cause of the economic destruction in Cuba is due to the embargo. Although the embargo may cause some struggles with the operations of different micro-companies on the island, it is not the primary reason Cubans suffer from massive poverty. If this statement is not convincing enough, the fact that Cuban ended last year in 175th place in the economic freedom index might clarify it.

As the conditions on the island have worsened after the “triumph” of the Cuban revolution, Cubans have come up with a solution to the shortages of supplies and services: black markets. These markets primarily supply capital and consumption goods that have either been sold in the markets by corrupt bureaucrats—hence, the intention of bureaucrats to create shortages on purpose—or imported to the island via commercial flights. (These imports are not to be considered smuggled by law since they are the baggage of the clients arriving at the airport. However, the goal of it is to be sold in non-regulated markets.)

Some may ask how accessible these markets are to consumers or how noticeable they are to the authorities. Well, the truth is that there are guides to show foreigners and tourists on the island how to access black markets. The black exchange operations have been normalized so much in Cuba that the only way the government had to fight back against these merchants was to start giving away licenses. Even though the government has formalized some sectors of selling operations, the majority of the black market in Cuba remains unchanged.

The black markets have grown over the last four years thanks to access to the Internet on mobile devices. The introduction of the Internet to the island has been prolonged due to the regulations and policies to strictly monitor and control what Cubans upload to their social media. Yet, the efforts to do so are limited because most Cubans use text encrypted-based apps like Telegram, Signal, or WhatsApp to communicate their offers.

Previous to the usage of these apps, the exchanges were done locally, depending on the knowledge of the existence of buyers and sellers. However, markets have evolved considerably, and some people now go to other provinces to buy the products. Under normal circumstances, buyers could ship those products and have them before your door by the next day. This is impossible, however, considering that Cuba’s mail service is highly corrupt. Oftentimes, if someone ships an item, it gets stolen.

In bringing items to sell on the island, Cubans do not constrain themselves. The need is so generalized that even ibuprofen is scarce. After the hit of Covid-19, the need for medication increased to the point that Cubans living outside the island were shipping drugs and selling them illegally. Bitcoin is also utilized in transactions because of the inflation level the peso is suffering. Steve Hanke said Cuban inflation was recorded last July at 85% per year.

Even so, some libertarians like Martha Bueno have expressed concern about specific platforms Cubans use for these transactions. These platforms can change Cubans’ Bitcoin into a central bank digital currency (CBDC) called MLC (“Moneda Libremente Convertible“). This currency is backed by nothing and was created by the Cuban government to collect foreign currencies and remittances that family members outside the island would send to their relatives. For this reason, Bueno suggested using currencies like Monero where addresses may not be deciphered; in that way, no one can determine when the transaction was done or where it occurred.

Again, the point here is not to suggest that Cuba is transitioning to a free-market system, but to demonstrate how black markets have arisen as a response to harmful regulations and to show how their development has impacted the lives of Cubans.

The rise of these black markets shows that governmental intervention is not a solution, and actually works against the wants and needs of us—the consumers.

For better or worse, even totalitarian states need markets to coordinate production and arrange resources.