Cuba Takes Another Step Forward to Join Global Economy

October 19, 2016

In Havana this past weekend, Cuba passed a new law to open the country to foreign investment. The latest in a series of reforms by Raul Castro, who succeeded his brother Fidel in 2008, this law encourages foreign capital in an effort to advance Cuba’s development and struggling economy. Many members of the international community remain skeptical of the law because of Cuba’s past history with foreign companies, which involved jailing foreign executives and strong attempts to gain control over successful foreign businesses in Cuba.1 The 576 members of the National Assembly voted to pass the new law in a special, closed-door session. Raul Castro also voted in favor of the law, which many critics think would never have been possible under former leader Fidel Castro.2 While some have praised the progressive law, some were disappointed with such a small change. Many wanted further changes such as permission for foreign ventures to “hire Cuban labor freely instead of through the government.” Cuba, who has been cut off from US business since the embargo in 1963, believes that their struggling economy is due to underinvestment.

After analyzing the state of the economy, Cuban officials now believe that Cuba needs $2-2.5 billion in foreign direct investment (FDI) a year in order to reach the goal of 7 percent growth per year. The current FDI in Cuba is estimated at a few hundred million dollars and the projected growth of the economy will be just 2 percent this year. This new law, which will take effect in 90 days, will slash taxes on profits in half, eliminate the labor tax, and gives new investors an exemption on profits for eight years. Tax cuts would still apply to companies that exploit natural resources like nickel and fossil fuels. These companies could pay taxes as high as 50 percent.3 The sectors Cuba hopes to boost with international business are infrastructure, sugar production, nickel mining, agriculture, real estate development and building restoration. Investment projects would be allowed in all sectors except healthcare and education. This new law is yet another attempt for Cuba to join the global economy.

Investments from outside sources are not exactly new to Cuba, however there have been significant issues in the past over company ownership, and because of this foreign investors will be approaching this opportunity cautiously. Richard Feinberg, a former national security advisor to U.S. President Bill Clinton said: "Given what we know so far, this is something of an improvement in the investment climate but some important obstacles remain. We won't really know until we see how it is applied in practice."1 Cuba’s communist government has also failed to follow through with proposals in the past. For example, Cuban officials let a proposal for extensive golf resorts expire without an explanation despite great excitement and support for the project. One anonymous European diplomat remains skeptical: "The problem with the new law is that except for taxes, little has changed, which means their attitude hasn't changed. In the end, the entire law remains discretionary."

Cuba’s traditional approach to foreign business has been illogical. Historically Cuba has accepted and encouraged ventures but the desire to want a bigger share of the success has driven some foreign investors away. They have also encouraged foreign financing but once the project is up and running, Cubans aim to take charge of the project.1 Since 2011 Cuba has closed more joint ventures than it has opened following economic reforms by Raul Castro. However, there are now hundreds of thousands of Cubans who are working legally independently from the state in the emerging private sector.3 Despite small victories such as this, there is still a long road to becoming a stable member of the global economy. After a 15-year long debate over who controlled the interest of the company, Anglo-Dutch consumer goods group Unilever ended their joint venture with the Cuban government. Cuba also imprisoned executives from Coral Capital Group Ltd, a British investment and trading firm. The executives were held on fraud charges and found guilty of minor charges last June. They were released for time served, which totaled more than a year. Previously the government was more likely to deport suspects but recently they’ve made it clear they are prepared to find executives “criminally liable.”1 Other businesspeople, like French entrepreneur Michel Villand, have ended all business ties with Cuba. Villand opened a chain of bakeries called Pain de Paris but his business is now in the hands of the Cuban government. In Villand’s book “My Associate Fidel,” he explains how his partners in the Cuban government defrauded him by keeping two sets of books. They then offered him an extremely low amount for his share. "Starting a joint venture in Cuba for a small or medium-sized foreign business is the same as putting a noose around your neck," Villand said of the project.

Other foreign companies have flourished in Cuba including Switzerland’s Nestle, Spain’s Melia Hotels International, Britain’s Imperial tobacco group, and Canada’s Sherritt International whose joint venture is for nickel mining. Kirby Jones, president of Alamar Associates, a consultancy for companies with an interest in Cuba said, "It's still a place to do business. Ask the Brazilians. They just put $800 million in there.”1Despite the past problems, investors and analysts acknowledge the new law’s importance in Cuba’s quest to entice more foreign investment. It marks a “true change” by the government and communist party that has been ruling since the 1959 revolution.

 


 

 

Sources

1.     Trotta, Daniel, and Mark Frank. “Cuba’s Past Raises Skepticism About New Foreign Investment Law.” The New York Times. March 31, 2014. Pg 1-4. Web. March 31, 2014.

2.     Oppmann, Patrick. “Cuba acts to draw more foreign investors.” CNN. March 31, 2014. Pg 1-3. Web. March 31, 2014.

3.     Orsi, Peter. “Cuban lawmakers OK key foreign investment law.” The Washington Post. March 29, 2014. Pg 1-5. Web. March 31, 2014.

About Author(s)

Kelcey Hadden-Leggett
Kelcey Hadden-Leggett is an undergraduate student at the University of Pittsburgh pursuing a degree in Spanish, a Certificate in Latin American Studies, and a related area Certificate in Portuguese. She recently completed the Pitt in Ecuador program in the Amazon.