What Makes an Economy Prosperous? Spotlight on Cuba and Argentina
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 499. It's titled, What Makes an Economy Prosperous? Spotlight on Cuba and Argentina.

Eight years ago, I visited Cuba for the first time with my son Brett. I had promised him years earlier that if Cuba ever opened, that we would go visit it. That opportunity came in early 2016 after the Obama administration loosened sanctions to allow more Americans to visit the island. We found the Cuban people incredibly warm and welcoming and...

very entrepreneurial. They all had some type of side gig catering toward tourists, one of the few businesses that the state allowed Cubans to operate, including the Airbnbs where we stayed. We didn't know what we would expect when we arrived in Havana. Would there be a strong military presence, a police state? We didn't see it. We saw a lot of

decay in the buildings. Obviously, the cars were ancient American cars running on Russian engines. Cubans weren't allowed to purchase new cars. When we think about the Cuban economy back then and now, a disaster. The economy remains primarily state-controlled, as it has been since 1959, after Fidel Castro

his forces overthrew the government and established a socialist state. The major industries, banks, and most businesses were nationalized. Cuba has been trying to centrally plan their economy for over six decades. This island of 11 million people, where 70 to 75% of Cubans work with the state. Things have gotten worse since...

2016, where there were a lot more Americans visiting Cuba, even though the government in 2021 allowed even more private businesses, allowed them to expand and employ up to 100 people, but they've had difficulty getting hard currency like the dollar.

to purchase inputs that aren't made on the island to build anything. We saw this in 2016, where the people we met that ran Airbnbs, they now had dollars, but there was nothing to buy. Economist reports, as they interview individuals in Havana, that the shortages in Cuba have not been this bad since the early 1990s. They point out that Cuba doesn't produce enough sugar.

which it once exported to the world. Not enough eggs, it now has to import those from Colombia. Or milk powder, which it gets from the UN. And they're not producing enough power. And that's why there's been a series of blackouts where the power can be off for four hours at a time in Havana, 12 hours or more outside of

the Cuban capital. The National Times reports that residents have to carry buckets of water from cisterns or wells because without power, they don't have running water. It got so bad that the president of Cuba, Miguel Diaz-Canal,

went on television wearing military gear, which he typically doesn't, and said they're working on it. That 90% of Havana has power, but it was only 36%. Prime Minister Manuel Marrero said the country could no longer afford to buy enough fuel on the international market to generate the power it needs. And it turns out the power generation capability, our old Soviet infrastructure that has not been maintained, the government is just unable to produce the basic necessities

needs of its citizens. But it also hasn't opened up its economy to allow more innovation and entrepreneurship. Before we continue, let me pause and share some words for one of this week's sponsors, Monarch Money.

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Since the early 1960s, U.S. government has had sanctions against Cuba. They haven't worked very well because, well, Fidel Castro has passed. His brother, Raul, is still alive, although in poor health. But the communists still control the country. It is still state-run and run very, very poorly.

Found a memorandum from the Deputy Assistant Secretary of State of Inter-American Affairs, Mallory, to the Assistant Secretary of State, Rubadon, that basically said the only means to sow dissension in the Cuban people is by them facing economic destruction.

dissatisfaction, and hardship, denying money and supplies to Cuba, decreasing real wages, bringing about hunger, desperation, and hopefully the overthrow of the government. That was the point of the economic sanctions, to make life difficult for everyday Cubans. And life is difficult for everyday Cubans and getting worse. It isn't just the sanctions, however. It's the complete mismanagement of

the government. But what the sanctions do is they make life difficult and it encourages people to leave. And they have. 10% of the population of Cuba have left in the last two years, mostly emigrated to the U.S. because there was an act, the Cuban Adjustment Act, passed in 1966, signed into law by President Lyndon B. Johnson, that promised them work authorization to get a green card, permaculture

permanent residency to any Cuban arriving in the United States. And they come, they come by boat any way they can, because what they have found is the sanctions actually harm those that are most disaffected, because the Cuban government, and this is the case with other countries that have sanctions placed against them, they protect their own, those that are close to them, supporting the government, while those that might be dissidents, they suffer the most. And

And in the case of Cuba, many of them leave. Not that they're active dissidents. As Brett and I went to Cuba and talked to people, they just want opportunity to start a business. If they have a business, to actually buy a lamp. In the case of the owner of one Airbnb when we stayed, because of the Cuban Adjustment Act, one

One study I saw found that Cubans adapt very well to coming to the U.S. They generally have higher income and wages compared to other Latino immigrants that come into the country, mainly because in the case of Cubans, they're allowed to come legally.

So here we have Cuba, continues to run shortages, just horrible living conditions. Now let's compare that to Argentina. We took a closer look at Argentina back in episode 233, and we quoted Simon Kuznets, who's a Nobel laureate, who said there's only four kinds of countries in the world, developed countries, undeveloped countries, Japan, and Argentina.

And what he meant was Japan and Argentina are unique, and we've done episodes on Japan. But Argentina used to be one of the richest countries in the world in the early 20th century. But it is known for having political instability. There were military coups in 1930, 1943, 1955, 1962, 1966.

and 1976. Argentina has defaulted on its government debt eight times. It's taking out numerous IMF loans, the most recent in 2022 for $44 billion after it couldn't pay back the IMF loan from 2018. Since we did that episode,

on Argentina, episode 233 in 2018, things have only gotten worse, especially when it comes to inflation. Inflation was 34% in 2018. And then it's been over 40% in 2019, 2021. 2022, it was 95%. And in 2023, inflation was 211%. The Argentine

Argentinians got so fed up with government mismanagement that they elected in November 2023 a libertarian economist who describes himself as an anarcho-capitalist. His name is Javier Millet. He got elected with a mandate to be an aggressive reformer. He said he would take a chainsaw to the country's dysfunction. He devalued the peso by

by more than 50 percent, because in Argentina, there's the official exchange rate, and then there's the black market rate, and there was a huge disparity between the two, as the black market rate is driven by market dynamics. So he devalued the peso. Millet cut the number of government departments in half. He reduced the size of the public payroll, eliminated

official perks of the president's office, including private jets, has sold hundreds of state companies, got rid of rent controls that were put in place in 2020 that basically kept a big supply of apartments. Owners of apartments, particularly in Buenos Aires, wouldn't rent them out at the rent control prices, just kept them off the market. And now that rent controls are gone, the supply of

Apartments has increased over 100%. These austerity measures have taken a huge economic toll. The economy is falling into a recession, expected to contract about 4% this year, but the government actually responded

ran a slight surplus this year instead of a deficit. For the first eight months of 2024, 0.3% surplus to GDP. And in July, the economy actually grew. And it's in the early stages. There is a lot of dysfunction in Argentina, a lot of poverty. The poverty rate increased 10 percentage points in the past year to 53%.

unemployment increased 1.4% by more than 136,000 unemployed as state government jobs get cut. Now, Millais says in an interview with Financial Times that more than 80% of economic indicators have turned positive, with real wages growing. He said,

strong growth. Even inflation has come down. Inflation was 3.5% in September, the lowest level since any month since 2021, even though it was still up 209% in the past year. They've seen the exchange rate between the official one and the black market one has narrowed, and you're actually seeing the financial markets respond. The

The incremental yield or spread for Argentina's bonds is now less than 10%. Typically, over 10% is considered a country in deep distress. The bond market, government bond markets, return 73% year-to-date. The stock market, which is considered a frontier market now, is up 68%.

and 136% in the past year. Argentina has a long way to go. It owes $14 billion in debt payments next year. The economy minister, Luis Caputo, said there will not be a default. Never, he says. President Millet says our commitment to pay our creditors is absolute total. But in order to do that, because it's dollar-denominated debt, they need to generate enough dollars to make the payment, and at this point, they're not there.

Argentina is starting to make progress. They're well ahead of where Cuba is, but they still don't have everything that's needed to be a prosperous economy. They're struggling. Before we continue, let me pause and share some words from this week's sponsors.

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What is it that makes an economy prosperous? Well, foremost is a reduction in uncertainty. If you don't know what inflation is going to be or interest rates or the rule of law or if the politics and the laws keep changing, how can you plan as a business owner or even a household? And that's the part that Argentina hasn't gotten to yet. Now we have the Malay administration in following a...

hectic three years of the prior administration where the economy just went completely off the rails. Prior to that, there was a more market-oriented administration, the McCree administration, but they got replaced. And so if there's a lot of uncertainty, if there's not the rule of law, it makes it very difficult to attract investment into your country. And Argentina definitely needs investment from outsiders to help

businesses become more productive. Case of Cuba, they need outside investment. So just the ability to import the inputs needed to make things because it's not made in Cuba right now. One, we need less uncertainty. Two, the money supply cannot grow faster than is needed to sustain the economy. There needs to be enough money to

creation to facilitate transactions. Can't be a shortage of money, but there can't be too much. Much of Argentina's problem is too much money creation by the government running the printing press. Money needs to be able to hold its value in the short term. There's always inflation, 2% to 3% per year.

but not 200% or 100%, because then that just leads to uncertainty, and you can't operate a business because you have to keep raising prices, and it's nearly impossible. And so the Malay administration is doing things to try to bring inflation down, but it was still over 3.5% per month. Economic prosperity needs freedom.

for citizens to start and grow businesses, to be able to move, to relocate, to hire employees. A prosperous nation needs an educated, growing workforce. It's hard to have a prosperous economy if the population is shrinking. More people, that's more ideas, more innovation, and that

It's like a flywheel that feeds into that greater prosperity. And so you need the investment in education. And that's one of the areas where Argentina fell short. It was prosperous in the early 20th century, but the people didn't become more educated. They just didn't keep up. And that led to challenges. A prosperous nation is becoming more productive. Each person is able to produce more.

with fewer inputs. Nation is sustainable as it does that. It's trying to produce more but not harm the environment at the same time. Many developing nations run into problems when it comes to what's known as the current account. Current account is mostly made up of trade. If an economy is importing more than it's exporting, then it runs a current account deficit. And that has to be financed.

in the sense that if a nation is importing more from the U.S. than it's exporting, then it needs dollars in order to pay for those imported goods and services. And those dollars come from capital flows, investment into the country, investors buying land and stocks and bonds. But if those investors get spooked, then they start pulling capital out and then the currency can crash.

And so many developing nations, and they learned this lesson after the emerging markets crisis in Asia in the late 90s, is to run a current account surplus, to be export-oriented. And in that case, a nation then is selling goods to other countries, and China is a primary example of this. So they're selling goods, exporting.

exporting more than they're importing. And so they have dollars then, which in turn they invest in the U.S. in treasury bonds, for example. The ability, the expansion of globalization for other nations to be able to do this, it's just, it's not as easy as it was because countries don't want to run trade deficit. Developed countries don't. Why? There's a lot of talk about tariffs and

in this presidential election. Prosperous nations have their current account deficit under control, or they run a current account surplus. Prosperous economies are diverse. They're not overly focused on one sector, and economies that are just primary commodity-focused or energy-focused, they run into trouble when commodity prices fall. And

And so a prosperous economy has prosperous households and businesses that are primarily buying services and creating service-based businesses and creating manufacturing businesses in a variety of sectors. But it is highly diverse, highly innovative with a lot of ideas and idea sharing. There's an ability to do that because there's just less uncertainty regarding these big macro issues. There aren't.

constant changes of the rules and the government isn't creating too much money leading to inflation. Prosperous economies do have some type of safety net. There's a lot of ingenuity, innovation, productivity improvement, growing workforce, education, opportunity for everybody to do better, but there's also protection if things don't work out. Now, the level of safety net will vary.

and that's something that needs to be negotiated among the citizens. But it's still there. The U.S., there's a social safety net, including Medicare for seniors. We were talking about this on our plus member forum. This is our premium membership community, money for the rest of us plus, and we don't have political discussions there. I try to avoid that. But I did make the comment that

Given, Lepro and I pay $13,000 a year for health insurance. I think the average family plan now is over 20. But if we have to go out and buy private health insurance when we're in our 70s or 80s or anyone else, it would be completely unaffordable if it was a market-based rate because that's when people get the most sick. And so there is heavy subsidies when it comes to health insurance for seniors. It's a type of safety net, just as there's other type of safety nets.

But the entire economy can't be a safety now. You can't have 75% of the economy employed by the state because it's highly inefficient. And so other socialist nations have realized this and they might have more state control, but they have allowed the private sector and entrepreneurs to flourish. This includes...

China has done it. Vietnam has done it. Still socialist nations, but there is some ability to create innovative businesses. Cuba has not done that. Argentina is starting to do it more, but they have to get some of these other factors under control, including too much money creation that led to the uncertainty of high inflation, default, et cetera. So prosperous nations, it's a combination of some top-down, mostly bottom-up,

But there's that certainty, a stable currency, modest inflation, the rule of law, the freedom to start and grow businesses, adapt, to move as an educated, growing workforce that is able to implement their ideas, increasing productivity, innovation. These big macro identities aren't out of balance. The country isn't.

running a big current account deficit, big trade deficit that needs to be financed, that makes the country vulnerable to capital outflows, leading to a collapse in their currency, which then increases the price of imports, leads to higher inflation. Prosperous economies are diverse in terms of the sectors that make it up, not a one-trick pony. And there's a safety net to protect casualties from dynamism with

within an economy. No country is perfect when it comes to those things. There are always challenges, political challenges, and it's a back and forth ebb and flow. But these are some core tenets. And then we've seen the countries that have been most prosperous have implemented those things and they've been able to grow. And

and continue to grow. And the U.S. is a prime example of this, that it has had this. And that's why it has done very well. Hopefully, that will continue, despite the fact that the U.S. does have a current account deficit problem and a national debt problem and slowing population growth, a lot of contention and lack of trust. So what's worked well so far, hopefully will continue. But there are clearly risks here, as there are in Australia,

other countries. That's episode 499. Thanks for listening.

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