Economics and politics of foreign investment (Updated)

Cuba’s legislature will meet March 29 to approve a long-awaited foreign investment law (Reuters).

For all the changes wrought to date, Cuba’s economy is not showing strong growth; agriculture reforms have not made a substantial dent in the import bill; and private sector (or “non-state,” as they call it) employment must grow more to enable the government job cuts that are needed.  Cuba also has what I call a “productivity gap” where many work in areas that do not match their skills and training and where pay incentives are weak.

More foreign capital – which President Raul Castro called an “urgent need” in a recent speech – would help to address Cuba’s long, chronic investment deficits and thereby help solve all the problems listed above.  (Former economy minister Jose Luis Rodriguez points out that in agriculture, where productivity is below the level of 25 years ago, investment in recent years has not even kept pace with depreciation.)  That is surely why the reform blueprint calls for policies that will foster greater foreign investment, in more sectors of the economy, and from countries that have no companies investing in Cuba today. They also call for taking a broader view of the role of foreign capital: instead of seeking it just for the sake of new markets and technology, it will now also be sought for job generation too; and instead of viewing it as a complement to lines of production already under way in Cuba, it will be sought to start entirely new activities.

In economic terms, it’s not a hard call.  But the politics have apparently been tricky. 

Outsiders tend to dismiss the tenets of Cuban socialism hatched 50 years ago, but many are alive and well and they have believers, including people in high places in Cuba. 

The revolution got rid of Batista and the U.S. mafia with which he did business, and in short order foreign ownership and capital were gone too.  You may call it a mistake, and you may say that the Soviet-era dependency was hardly an improvement.  But there, they called it economic sovereignty, one fruit of a political victory that claimed to make Cuba truly independent for the first time in its national life.

The debate over increased foreign investment has not been open to us, but the opposition to it (see Cuban media articles cited below) seems to have to do with sovereignty and control – the idea that Cuba might cede control over part of its economy, or start sharing profits that would otherwise be solely its own.

Neither idea holds water.  Within the incentive structures that will in fact attract foreign capital, Cuba can control the terms under which foreign companies work.  And there’s not much benefit in guarding 100 percent of the profits of enterprises that will never come into being for lack of domestic capital to start them.

I’ll read the fine print of the new foreign investment law, but I think that what matters most – for Cuba’s own benefit – is whether Cuba develops a new foreign investment attitude.  Plenty of investments have occurred under the law currently on the books; what prevented more was reticence on Cuba’s part.

As for the fine print, these are some of the key questions.

Will there be preferential tax and tariff treatment across the board, or will preferences be decided in the negotiation of each deal?

How will worker compensation be treated?

Will the central government approve all projects involving foreign capital, or will provincial governments or other entities be permitted to negotiate and approve them?

Will the law provide a means for parties outside Cuba to invest in private businesses in Cuba – individual entrepreneurs’ businesses, the new cooperatives that include some small-scale industrial operations, and farm cooperatives?

What set of potential investment projects will Cuba present to potential investors?  Will it include sectors such as agriculture and sugar, where foreign investment has not been viewed as desirable for the past 20 years?

From the Cuban media:

An article posted at Radio Reloj calls foreign investment a “saving transfusion for the Cuban economy” that is “threatened by lack of capital” and “calls out for an injection that can only come from the other side of our borders.”   It cites the example of tourism investment in the 1990’s, an “intelligent” decision that was viewed as “risky by many.”

In Granma, Minister of Trade and Investment Rodrigo Malmierca noted that foreign investment policy is central to the economic reform process and also has a “deep political connotation.” 

In an article posted at Radio Cubana, legislator Jose Luis Toledo explained that the government places a priority on incentives for foreign investment, “but with absolute respect for national sovereignty,” and he noted that “protection of national patrimony” is among the main concerns voiced by other legislators.

Granma reported on a meeting of legislators from several provinces on the draft law; the article began by noting that the new law “will in no way mean that the country is for sale or that there will be a return to the past.”

Update: Progreso Weekly’s summary of the draft foreign investment law, and Reuters’  comparison of the current law and the new one.