In March this year, the Cuban government announced a new law on foreign direct investment (FDI). The aim is to boost growth on the island. But what does the new law mean exactly and will it improve the country’s economy? Can the communist government reconcile itself to capitalist free enterprise to improve the lot of the ordinary Cuban? At first glance it would appear that the government is looking for a new ‘best friend’ since the demise of Hugo Chavez, the president of Venezuela. Cuba relied heavily his special relationship with Fidel Castro and Venezuela exported food, raw materials and oil to Cuba on preferential terms. Now Venezuela is suffering its own economic problems Cuba must look elsewhere. Brazil has stepped in to some extent, but the democratic government there has different terms. The law, according to many, does not go far enough, and Cuba would do well to follow the example of other small island economies that have flourished using FDI as a central policy.
Broadly speaking, the law, which will take effect in late June, offers tax breaks for new investors and property guarantees for investors. New investors into joint ventures or partnering with cooperatives will enjoy eight tax free years, paying 15%, half the current rate, after that. Not so encouraging is the fact ventures funded completely by foreign money do not automatically qualify for these breaks and will have to get a special exemption from the government. This leaves room for the imposition of arbitrary or unusual rules on those companies.
The new law is still patchy, according to many observers. It updates an older law (1995), but crucially still insists that companies must hire workers through the state-run employment agencies. This means the cost of labor is inflated as these agencies charge in, and keep, hard currency paid by the FDI investor, yet pay workers in local currency. The conversion rate the government uses to pay the workers in local currency also means that the state keeps two thirds of the money received, so is the only winner in the arrangement. The highest employment tax in the world!
One observer, says that Cuba is missing a trick if it does not look to Cuban emigrants living in countries where they are not subject to the US embargo. These people have more incentive to invest in Cuba, than non-Cubans, and Havana should be looking to court these people.
Most of the current money inflows to Cuba are relatives’ remittances from the US. They are investing in small businesses such as hairdressers or paladares (restaurants), but they are not specifically mentioned in the new law. This it seems is a case of ‘divide and rule’, ignoring those with the highest vested interest in the economy, in favor of large foreign investors.
Crucially, though the new law seems to imply that foreigners are allowed to own property on the island. This would seem to be one way that Cubans living outside the US and Cuba could invest. In fact, there is a property market in Cuba, though not an official one. Cubans have been allowed to own property on the island since 2011, but it seems most of the money is coming from abroad in ‘under the table’ deals that have little legal protection.
There are also still worries about claims on property from exiled Cubans after the land expropriation by the state following the revolution. It seems there are many pending building applications with the government that are still waiting approval.
One major development financed by FDI is the enlargement of the Mariel Port at the northern end of the island. Enshrined in Law 313 last year the area has been designated, Chinese style, as a special development zone, where foreign companies will enjoy 100% ownership and can take profits from any activity there. The money has come from the Economic and Social Development Bank of Brazil (BNDES), and 32 Brazilian companies will be involved in the port development and subsequent use. Brazil’s Export Development Agency recently took delegates from companies ranging from the retail to the construction sector to see the Mariel development and the country is hoping to use it as a hub to reach other growing economies in Central America.
This it seems was why president Xi Jinping of China did not visit Cuba, one of his ideological allies last year, on a visit to the region. Since 2005 China has provided more loans to Latin America than the World Bank and the Inter-American Development Bank combined. Like Brazil it sees other places in the Caribbean and Pacific (Mexico) as more strategically important. This year, however, the Chinese Foreign Minister, Wang Yi, did visit Cuba, promising to strengthen ties with the country in key areas such as trade, investment and energy.
It is still difficult to find information on FDI into Cuba. Some cases of Joint Ventures (JV) from the 1990s have been documented, though to varying degrees of transparency. They are mainly in association with State-owned enterprises (SOEs). Sherrit, the Canadian metals and mining group, has invested heavily in both nickel mining and oil and gas production in Cuba. Its latest annual report does not state the revenues it gets from Cuba alone, but says its 50% JV with the General Nickel Company of Cuba produced more than 36,000 tonnes of nickel and cobalt and details its continuing expansion plans on the island. It is also making a significant contribution to Cuba’s energy needs, producing oil and gas and generating electricity.
Unilever the FMCG giant, does not consider its revenues from its Cuban JV with Suchel, worth detailing in its 2013 annual report (P. 135), listing it only among numerous countries where Unilever has operations but in the opinion of the directors, whose revenues do not affect the company as a whole. In reality, JVs operating in Cuba discover that socialism, while not exactly a capitalist’s paradise, offers a number of distinct advantages. Once admitted, JVs are often granted monopolies, or dominant market shares, in key market segments. Competition both national and overseas, is restricted by the state and the partner company often acts as a bargaining power with the government.
There are disadvantages too, however: the state exercises total control; no price increases are allowed; JVs have finite contracts which generally mean less investment towards the expiry date of the contract; there is risk as the state intervenes between the company and its suppliers; the JV partner often has conflicting loyalties – to the JV and to the state; the state can alter the rules without warning.
In the absence of meaningful statistics, particularly on FDI, one way of benchmarking Cuba is against other emerging economies. Feinberg cites Costa Rica as a good example that Cuba would do well to follow. Attracting FDI was made a central policy by the Costa Rican government in the early 1990s to the extent that it has now risen to over 5 per cent of GDP. Alongside this GDP per capita has risen to $10,500 and consumption has also gone up. It is now attracting companies in the technology and service sectors too.
Another example is Ireland, with a slightly smaller population of 6.3 million, compared to Cuba’s 11.2 million. Like Costa Rica, Ireland is a small latecomer to industrialisation, but thanks to its liberal tax policy it has succeeded in attracting transnational companies to set up there. Companies such as Intel, Google, and IBM in the technology sector and the likes of Citi, Goldman Sachs and Zurich in the banking sector all have operations there.
What seems to be clear is that the government needs to expand and clarify its new law on FDI, otherwise the status quo will be maintained, and potential investors will be put off. Many sectors would benefit from investment, but while investing in businesses is so difficult, Cuba’s economy will remain stifled.