Cuba is a low recipient of foreign investment. After a surge in 1994-2000 following the demise of the Soviet Union, foreign investment has played a very small role in the economy.[i] Lamentably foreign investment data are not published either by the Cuban government or by countries of origin. Nonetheless national income accounts provide bleak indicators of the very low rate of capital formation in the island and of accompanying foreign capital.
Gross capital formation as a percentage of GDP was only 8.6% in 2011, a level barely sufficient to replenish depreciation, having fallen from a top of nearly 15% in 2008 at the start of the international financial crisis. As a comparison the same statistic for the average of the other 19 Latin American economies was 22.1 % in 2012, and foreign direct investment averaged 4.3% of GDP.[ii] Applying the same proportions to Cuba would suggest foreign direct investment in 2011 of about 1.6% of GDP. Even this modest estimate, however, appears to be high as it is not possible to find projects to account for it. The largest on-going project with foreign involvement in Cuba, the Mariel port expansion is a multi-year project financed by credits not equity from the BNDES development bank of Brazil.[iii] Data on capital goods imports which would accompany foreign investment also place an upper limit on foreign direct investment at probably below 1% of GDP for 2011. The falling trend in capital goods imports as a proportion of capital formation also point to the dominant role of domestic sources of investment.
Why is foreign investment so low in Cuba? To start, the abysmal political and economic relations between Cuba and the United States create an unfavorable external environment with adverse legal and export market implications for US and third country corporations that want to invest in Cuba. Nonetheless, the Cuban economy is tiny in relation to the flows of international investment capital and given proper domestic economic, regulatory and juridical conditions it should be able to provide reasonable risk-adjusted returns to equity capital given its educated labor force, consumer market, political stability, natural endowment and transportation facilities. Moreover the low level of domestic investment (and savings) is a powerful motive to adopt and implement policies that foster the investment climate. To this effect the Lineamientos or policy guidelines approved by the Communist Party in 2012 and recent statements by Raul Castro and government spokesmen signal renewed attention towards foreign direct investment. A new foreign investment law will be considered by the National Assembly in March 2014.[iv] The new law is expected to consolidate and make changes in some regulations and the approval process.[v] A major conceptual change is reported to be the acceptance of foreign investment on its merits and not as an adjunct to the national plan’s goals and priorities.
The poor results regarding foreign investment do not follow only from the current legislation but even more from the discretion of policy makers in its application or the lack of it. The main foreign investment law (Ley 77 of 1995) for example allows the approval of wholly owned subsidiaries of foreign corporations while the government has seen fit to approve almost exclusively joint ventures with majority control in the hands of a local state enterprise or other governmental entity. In fact there are only a handful of wholly owned foreign investments in Cuba (excepting bank and commercial representative offices) and these correspond to Venezuelan owned firms. In a country where capital is scarce, restricting ownership makes little sense as minority holdings imply weak autonomy for the foreign investor that reduces his ability to manage the firm and thus his incentive to invest. The approval process which by law should be initiated within 60 days often involves arduous negotiations lasting years.[vi] The process is cumbersome often involving more than half-a-dozen agencies. Ministries have discretion to not approve projects or impose restrictions based on often opaque strategic reasons and priority rankings involved in the national plan.
The inauguration of the first stage of the Mariel Special Development Zone in January 2014 launches a new mechanism to attract foreign investment.[vii] The Mariel decree-law by simplifying the approval process in the hands of a single specialized agency will likely serve as a model for forthcoming legislation. The Zone provides comprehensive port, utilities and other infrastructure. The Mariel law also stipulates customs and tax holidays for investors in the zone.
The new Mariel Zone may be following loosely the special development zones created in China in the 1980’s and 1990’s. Those however aimed to create free market zones out of extensive urban and rural areas and generally operated in a decentralized fashion from the national authorities.[viii] The Mariel Zone on the contrary depends on the Council of Ministers for ultimate approval of projects and fails to lift one of the main impediments to foreign investment in Cuba, the lack of a free labor market. The Mariel decree-law maintains the requirement that foreign companies contract local employees through designated Cuban state agencies. Local workers are paid a small fraction of the wages paid to the Cuban government by the foreign entity in hard currency (or convertible pesos).[ix] This is unfair to workers and raises costs, reducing the rate of return of projects, curtailing employment and inhibiting reinvestment of profits.
As projects in Mariel are presented for approval it will become clear whether or not the climate for foreign investment in the island is changing towards a more open and less discretionary regulatory environment than in the past. The maintenance of a tightly controlled job market in the flagship foreign investment project is hardly auspicious of change away from an ideology of centralization, control and high taxation of labor.
[i] Pavel Vidal, Omar E. Perez and Saira Pons, La Inversion Extranjera y de la Union Europea en Cuba. La Habana: CEEC, 2012.
[ii]The World Bank, World Development Indicators: Structure of Demand, wdi.worldbank.org/table/4.8
[iii] BBC Brazil, January 12, 2012
[iv] BBC Mundo, “Raul Castro anuncia nueva ley de inversion extranjera”, 21 de diciembre de 2013.
[v] For a summary of existing legislation see Pavel Vidal, et. al., pp 3-5 and Richard Feinberg, The New Cuban Economy: What Roles for Foreign Investment?, Washington: Brookings, 2012, pp. 11 – 15.
[vi] Feinberg, op. cit., p. 12.
[vii] The decree of the Council of State establishing the zone is Decreto-Ley Numero 313 published in the Gaceta Oficial No. 26 Extraordinaria of 23 September 2013. The rule-making Decreto-Ley Numero 316 was published in December 2013.
[viii] Xiao Wang, The Role of Economic Development Zones in National Development Strategies: The Case of China. Rand Corporation, 2013, pp.16-26.
[ix] Decreto-Ley 313, Articulo 31.