Cuba and an Investment Law
HAVANA TIMES — On March 29, parliament debates the new foreign investment law to govern “in almost all sectors of the economy” (1), advanced José Luis Toledo Santander, head of the Constitutional Affairs Committee of the National Assembly.
The issue is vital for Cuba, so much so that the former Minister of Economy José Luis Rodríguez says that “the increase in the rate of growth of the Cuban economy ( … ) represents a significant increase in investment in the coming years”. (2)
The law aims to attract more foreign entrepreneurs by offering greater guarantees and assurances. Toledo added that it even “includes bonuses and total tax exemptions in certain circumstances, as well as flexibility in Customs.”
The issue is closely linked to the Mariel Special Development Zone project with financial and technological support from Brazil, which aims to create a kind of Caribbean Hong Kong, with different rules than those that apply in the rest of the country.
And other regulations will be needed because it is not difficult to imagine the face of new investors when informed they have to pay a quarter of a million dollars for each new car they buy for their business in Cuba.
The amazement will repeat when they learn the cost of Internet service and more so when they realize how slow the connection is, coming from the same server used illegally for resale of connections on the black market, the mechanism by which Cubans can gain access from home.
The contracting system in Cuba
José Luis Toledo ensures that among the concerns of the legislators is the “labor rights of Cubans who would work on these projects,” also a concern of citizens who are already part of these companies.
Under the current rules, to hire staff for their companies investors are forced to resort to the government’s employment offices. For being the intermediary in the contracting they keep 90% of the salary that the employer pays its employees.
The remaining 10% is not enough to live on, so if the employer wants to require efficient work they are forced to give an extra bonus in hard currency, also taxed at 35%.
Employees of foreign companies can be considered privileged over other Cubans. Nonetheless, many feel upset when they learn that the state retains such a higher percentage, more than even paid in Scandinavia.
In this sense, José Luis Rodríguez proposes “more flexible contracting arrangements for the workforce without relinquishing control of the labor system of partnerships with foreign capital, using an appropriate wage and fiscal policy.”
Challenges for Cuba
Another obstacle is the state’s import companies, the only ones authorized. These are monopolies that enjoy enormous power of decision and are known for very slow management and sometimes lack business integrity.
And last but perhaps most important according to Rodriguez is “to increase credibility by normalizing the payment of outstanding debts with different creditors” and the timely payments to business people who currently trade with the island.
For those late payments, sometimes due only to bureaucratic reasons, Cuba spends more on imports. Foreign entrepreneurs increase the profit margin to cover the interest to be paid to the banks financing their operations.
The challenges facing the Cuban parliament in its attempt to promote foreign investment are huge and their success will depend on their understanding what they are saying when they assure that in the new foreign investment law “there will be no concessions or setbacks.”
If not making “concessions” means that national interests will be defended and that “in no way will mean selling the country” can be a long-term guarantee that a nation that already belongs to the new generations of Cubans will not be mortgaged.
But if to avoid “setbacks” the Kafkaesque web of irrational regulations and inefficient agencies remains, Mariel will be no more successful than the failed free trade zones opened with equal fanfare two decades ago.
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(*) Visit Fernando Ravsberg’s blog (in Spanish).
The Castros are self-deluded into believing that economic progress in Cuba is solely dependent upon the “if we build it, they will come” premise. Lacking in the Castro strategy is the wisdom that any successful company wanting to do business in Cuba is already doing business somewhere else and that in order to attract them to Cuba, the Castros must offer a far better deal than the deal this company currently enjoys. To do so will demand that the Castros practically give away the store. This will likely leave Cuba no better off than before the venture began. Possibly worse. Enterprise zones are best used to incubate new businesses that need the giveaways to gain a foothold in getting the business going. Established businesses generally take advantage of free trade zones to exploit an overanxious host government.
Mr. Ravsberg correctly points out that just setting up a “free trade zone” has no sense and is doomed to fail if “the Kafkaesque web of irrational regulations and inefficient agencies remains”.
The problem is that that “Kafkaesque web” is totally intertwined with the system as it is and is the “natural environment” of the web of corruption and paternalism in Cuba. Removing one will require damaging the system of control and an important source of “benefits” for the elite. Up to now the regime has paid lip-service to an anti-corruption drive that many see more as a way for the Raul Castro / military elite to eliminate “competitors” in the system.