Cuban investment and competition

havana-live-investment-lawHAVANA 9th April (By David Jessop)   On March 29 Cuba’s National Assembly passed a new foreign investment law. Its content has far reaching implications for the future economic organisation of the country. It has also stimulated a lively public and private debate in the rest of the Caribbean about whether it represents a new economic challenge to the rest of the region.
Unusually, the changes that the new law contains had been widely trailed in Cuba’s national and provincial  media before its passing. This was because of its contentious nature within Cuba and the challenge it offered to many Cuban conservatives’ belief in the need to maintain full control over national sovereignty and economic decision-making.
The result was the slow progress as sometimes challenging political and technical discussions took place in provincial assemblies and in consultations with mass organisations such as the trades unions. At these meetings various concerns were expressed.  Particularly contentious was whether the same investment rights would be granted to Cuban Americans, who, having left the island, significant numbers of Cubans believe, should not be able to benefit. There were also voices at the liberal end of the debate questioning whether the law should enable investment by a small group of increasingly wealthy Cubans living in Cuba and paying taxes. The passing of the new investment law marks a clear victory for President Raúl Castro, and those at high levels within the Cuban Communist Party who recognise the need for change.  It reflects too a view that fundamental reforms within Cuba are more likely to take place during the period up to 2018 while Raúl Castro remains as President and retains the moral authority to argue for and ensure change. The lengthy debate speaks also to the fault lines that continue to exist between those who are seeking to maintain a more pure socialist line and those who believe Cuba has no option but to reform and modernise.
Details of the new law have been well publicised, but in essence the new legislation will modify the existing foreign investment law that dates back to 1995, bringing it in line with the government’s broader project of updating its socialist economic model.
According to a front page article in Granma, the official newspaper of the Cuban Communist Party, the legislative proposal is intended to increase the rate of economic growth and increase funds for investment so as to “accelerate the development of prosperous and sustainable socialism.” It allows for foreign investment in all sectors except education, health and ‘armed institutions’ and will offer tax exemptions to overseas companies.
In a break with the past, the new law establishes foreign investment as a priority for the future development of Cuba; aiming to revive local industry; and making Cuban goods competitive on the world market through new financing, and access to advanced technology and know-how in key areas, such as agriculture, industry, tourism, biotechnology and renewable energy. Under the new law investors will be exempted from paying tax on profits for eight years upon the signing of an agreement; investors will be exempted from income tax; 100% foreign ownership will be allowed, but such companies will be denied the same tax benefits afforded to joint ventures with the Cuban state or associations between foreign and Cuban companies; the new law does not specifically exclude Cubans living abroad; and state-run companies, private farm and non-farm cooperatives can be authorised to form ventures with foreign investors.
One of the interesting side effects of the law’s passing has been a debate in parts of the rest of the Caribbean about the possible negative effects of Cuba’s emergence at some future date as a significant beneficiary for foreign investment and its potential to out-compete near neighbours. The comments, while understandable, perhaps say more about much of the region’s continuing failure to understand that competition is not a zero sum game, that the rest of the region has had more than fifty years to prepare while Cuba has been economically isolated; the lamentable failure of Caricom to create a viable single economy or to address the economic imbalances between its smaller and larger members; and many nations continuing failure to recognise that to succeed it is first necessary to identify where future competitive advantage might lie.
Cuba’s unusual process of trying to adapt market economics reality to the needs of its unique social model should therefore be a moment not for hand-wringing in the Caribbean, but a change to be welcomed if as seems likely it portends further gradual and stable change. Whether what has been agreed will transform Cuba or as seems more likely, as with much of the Cuban economic reform process, this may involve a kind of learning through doing process rather than planning, remains to be seen, but it should be welcomed.
As the year goes on at least two leading US private sector associations are expected to take high level delegations involving a number of major US corporations to Cuba. Although many pressures still surround the process of US economic re-engagement it is clear that US business is acutely aware of the potential opportunity now opening up.
This seems to have spawned an increasingly aggressive approach on the part of the US Treasury which by placing pressure on the international banking system and individuals in Europe and elsewhere to reserve the future Cuban market for US business alone.
For its part, Europe is in the process of re-engagement through negotiations for an association agreement that could lead eventually to a freer trade and development relationship. The first formal exchanges on this are expected to take place very soon.
That said, the biggest challenge now lies within Cuba itself as it weighs how flexibly and rapidly it will implement its new law and how its seeks to balance competing interests between a future improved relationship with Washington, which it genuinely wants, a closer relationship with Europe, an interest in resuming a closer relationship with Russia and its desire to see stability return to Venezuela.