Cuban Investment And Competition

Cuban Investment And Competition
Published: Sunday | April 6, 2014
David Jessop, Contributor

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 challen-ging 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 Raul 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 Raul 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 outcompete 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 50 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 handwringing 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 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.

David Jessop is director of the Caribbean
Council.david.jessop@caribbean-council.org

Source: Cuban investment and competition - Business - Jamaica Gleaner -
Sunday | April 6, 2014 -
http://jamaica-gleaner.com/gleaner/20140406/business/business10.html