A recent New York Times Article revealed that Cubans can’t afford diet staple foods because of increased tourism in Cuba. In response, Raúl Castro has pledged to crack down on middlemen for price gouging, and institute price controls on certain fruits and vegetables. While Castro’s engagement of the issue signals the government’s theories for reasons behind the rise in prices, I argue instead through the lens of economics that not only will these actions worsen the issue at hand, but that these results are expected as Cuban goods reenter into global markets.
Onions, tomatoes, green peppers, lettuce, pineapples, cilantro; these are a few of the produce items that Cubans report they can no longer afford. As the NYT article discusses, increased tourism is leading to private restaurants purchasing many of these items in bulk, which are then converted into delicious dishes served to visiting tourists. Because these tourists have much higher incomes than many Cubans working in the public sector, restaurants drive up prices because they can pay higher prices for it.
This increase in prices reflects Cuba slowly opening up to global markets once again. The influx of tourists into Cuba (estimated at over 3 million this year) means that prices are naturally going to rise due to higher demand from the tourist influx, but a stable supply curve. Due to a lack/ban of pesticides, Cuban produce is organic, and tractors are decades old; this means that it’s hard to increase agricultural yields without the ability to bring in more capital to invest in the agriculture industry, something that’s been very difficult to do due to the US embargo.
If higher demand, lack of increasing supply, and prices rising to global prices are the reason for this food shortage, then Castro’s plans to alleviate the shortage will not help. It’s entirely possible that middlemen are driving up prices, as corruption can occur in all systems of government, but it is likely that higher demand is the more important cause of price increases.
What about price controls? Economic empiricism shows that price controls only help if it expands a market. As an example, if a monopoly was restricting the competitive quantity of produce to produce, reducing it to a monopoly quantity to maximize profit, then a price control can expand the market by forcing a profit-maximizing monopolist to produce more. If indeed Cuba’s economy is producing at a competitive equilibrium, then price controls will exacerbate a shortage: farmers will not be willing to produce as much if they get lower prices than a price matching demand, but even more people would be willing to buy goods at that price.
If the Cuban government insists on these controls, the people of Cuba will be those who are hurt the most. Instead, the Cuban government should focus on increasing native agriculture to feed a greater number of people in Cuba a healthy, varied diet.