Tag Archives: Foreign Exchange Earninigs

‘NOW IT WILL ONLY GET WORSE’: CUBA GRAPPLES WITH IMPACT OF UKRAINE WAR

Posted on May 17, 2022 by Arch Ritter

May 17, 2022,  Marc Frank in Havana

Cuba Abstains re Russion Invasion of Ukraine

Russia’s war in Ukraine has created fresh problems for its Caribbean ally Cuba, already shaken by street protests and facing severe financial stress amid tighter US sanctions and a pandemic-induced collapse in tourism.

Cubans have contended with chronic shortages of food, medicine and other basic goods for more than two years, owing to the country’s heavy dependency on imports and lack of dollars to pay. Now, there are fuel shortages, more blackouts and less public transport as the island’s communist government battles to secure costly petrol and diesel supplies.

 “It’s the war. We’re already screwed and now it will only get worse,” said Antonio Fernández as he waited at a petrol station in the Playa area of Havana, the capital, to fill up his battered Chevrolet, which doubles as a taxi.

Russia was originally supposed to be guest of honour at this month’s international tourism fair in the beach resort of Varadero until the closing of western air space to punish Moscow over its invasion made flights to Cuba prohibitively expensive. Thousands of Russian tourist bookings were lost. Tourism minister Juan Carlos García Granda said Cuba was working with Russian operators to see what could be done. “We want to rescue that market, which was the main provider during the pandemic,” he said this week.

Tourism is a mainstay of Cuba’s economy, but just 575,000 visitors arrived in 2021, compared with more than 4mn before coronavirus struck. A quarter of last year’s arrivals were from Russia. Cuba had hoped for 2.5mn tourists this year but the loss of its biggest market makes that a tall order. Russian tourists queue at Juan Gualberto Gomez airport in Varadero. Tourism is a linchpin of Cuba’s economy but visitor numbers have slumped © Yamil Lage/AFP via Getty Images

The worsening situation has fuelled an immigration crisis at the US-Mexico border, with about 100,000 Cubans crossing since October last year. That number is already greater than the number that fled in 1994, the last surge of Cuban migration, and is approaching the 1981 peak. The US has accused Havana of using migration as a safety valve to limit discontent in Cuba.

On the island, many foreign suppliers and investment partners are demanding cash on delivery having not been paid for months. Imports are down 40 per cent since 2019. The director of one Cuban company said his business was “already suffering from cuts in our monthly electricity allocation and last month our diesel was reduced to almost nothing”.

The Ukraine war threatens to torpedo any recovery in Cuba following a 9 per cent fall in gross domestic product in 2020-21. The country suffers triple-digit inflation, caused in part by a devaluation of the peso and demand for scarce goods. Even after the devaluation, the dollar still fetches four times the official rate on the black market.

Various western businessmen say payment problems in Cuba have worsened since the Ukraine invasion as the government struggles with high commodity and shipping costs. Some European traders were being paid via a Russian bank, said one trader, adding that this had now stopped.

“Ministries are going to all joint ventures asking what the minimum is they need to stay open,” said one foreign investor, adding that his Cuban partner had contributed nothing for months.

Economy minister Alejandro Gil admitted recent events were “greatly affecting economic activities”, citing high fuel prices as an example.

Pavel Vidal, a former Cuban central bank economist now at Colombia’s Pontificia Universidad Javeriana Cali, said sanctions against Moscow were weakening Russia’s ability to support Havana and would “add more problems to a balance of payments that has been in crisis for several years”.

 Moscow has sent several cargoes of food and humanitarian aid this year and did so in 2021, although trade and investment remain only a fraction of the levels in Soviet times. Russian president Vladimir Putin and his Cuban counterpart Miguel Díaz-Canel agreed during a phone call in January to deepen “strategic co-operation”, but past promises of Russian investment on the island have been slow to materialise.

The Ukraine war has been diplomatically awkward for Cuba, with its government blaming the conflict on the US and Nato while also calling for the respect of international borders.  Paul Hare, former UK ambassador to Havana, said Cuba, like other Russia- aligned countries, had been embarrassed by the invasion, noting how the island’s government had wanted to deepen relations with the EU. “That perhaps explains why Cuba didn’t vote against the UN General Assembly on March 2 condemning the Russian invasion but abstained,” he added.

Hare, now a senior lecturer at Boston University’s Pardee School of Global Studies, said the war had forced Cuba to pick the wrong side in what the EU considered a strategic threat. Relations with Brussels were already strained because of the draconian prison sentences imposed on hundreds of participants in last year’s anti-government protests.   “Cuba will be seen as complicit in Putin’s attempt to redraw the map of Europe and upend the world order,” he said.

Hal Klepak, a Canadian military historian who has written two books on Cuba, said the island’s armed forces remained heavily dependent on old Soviet equipment and Russian support. The first had been discredited in the Ukraine war and the second was now in doubt because of the invasion’s cost.

 Despite the problems, political change in Cuba 63 years after the revolution that brought the Castro brothers to power seems unlikely.  “Emigration serves as a safety valve for discontent,” said Bert Hoffman, a Cuba expert at the German Institute of Global and Area Studies. “As long as there are no signs of major elite splits then regime continuity is the most likely scenario.”

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SHERRITT INTERNACIONAL PLANEA EXPLOTAR YACIMIENTOS DE NÍQUEL EN CUBA POR ‘VARIAS DÉCADAS’

Posted on October 30, 2021 by Arch Ritter

El presidente general de la compañía afirma que se estudian opciones para ampliar la capacidad de producción de la planta de Moa, que el pasado año quedó por debajo de lo previsto.

Diario de Cuba, Moa 21 Oct 2021

Articulo Original: Sherritt Internacional

El presidente general de la compañía canadiense Sherritt Internacional Corporation, Leon Binedell, afirmó este miércoles durante una visita a Cuba que planea aumentar la producción de Níquel en Moa para seguir explotando los yacimientos por “varias décadas”, informó Granma.

“Estamos considerando opciones para ampliar la capacidad de producción de la planta y continuar operando en este lugar por muchas décadas más”, dijo Binedell durante una visita a las instalaciones de la compañía acompañado por el ministro de Energía y Minas cubano, Liván Arronte Cruz.

La fábrica procesadora de níquel Comandante Pedro Sotto Alba, ubicada en el municipio holguinero de Moa, es operada desde 1995 por la compañía mixta Moa Nikel S.A, administrada por Sherritt, quien firmó un contrato con el Estado cubano para explotar yacimientos y ejecutar otras inversiones en el sector energético.

Tras el cambio en la directiva de la compañía canadiense, dado por la llegada de Binedell en sustitución de David Pathe, las autoridades cubanas temieron por el fin de los acuerdos, pero el actual director ha manifestado su interés en mantener los negocios en la Isla.

Durante el encuentro, reseñado por la prensa estatal, Arronte Cruz dijo que la fábrica está a punto de cumplir 27 años de fundada como corporación mixta, lo que calificó como un buen momento para seguir consolidado su eficiencia.

De acuerdo con la prensa estatal, la planta procesadora de níquel Comandante Pedro Sotto Alba mantiene récord históricos de producción y es uno de los ejemplos más referidos respecto a los negocios entre Cuba y Canadá.

Sin embargo, en 2020 la empresa canadiense comunicó que las dificultades que encaró durante en su planta y negocios mineros en Moa influyeron negativamente en su balance productivo anual.

El líder mundial en la extracción y refinación de níquel y cobalto de minerales lateríticos, con proyectos y operaciones en Canadá y Cuba, anunció que su producción terminada de níquel en Moa fue de 31.506 toneladas en 2020, ligeramente inferior a la proyección de entre 32.000 y 33.000 toneladas en ese periodo.

Según el balance de la empresa, resumido por el sitio especializado Kitco.com, la producción se vio afectada por las interrupciones del servicio ferroviario que tuvieron lugar durante el primer trimestre del año.

Asimismo, Sherritt sufrió el cierre prolongado de la planta Pedro Sotto Alba durante el tercer trimestre debido a trabajos adicionales y a la reducción de la disponibilidad del contratista cubano a causa de la pandemia del Covid-19, así como por reparaciones no planificadas de las autoclaves en el cuarto trimestre.

Además, numerosos residentes en la localidad han denunciado el defectuoso sistema de abastecimiento de agua y la elevada contaminación que provoca la procesadora en Moa.

A la escasez de agua, la sequía y la contaminación ambiental se suma en Moa el desabastecimiento de alimentos y productos de higiene, razón por la cual un centenar de residentes de la localidad protestaron en plena calle a mediados del mes de junio de 2020, según se pudo observar en un video compartido en Youtube.

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CUBA: SERVE THE PEOPLE; Cuba Is Facing its Worst Shortage of Food since the 1990s

Posted on July 8, 2021 by Arch Ritter

Government bungling and a shortage of dollars are to blame

The Economist, July 3, 2021

Original Article: Cuba’s Food Crisis

“CUBANS HAVE always been resourceful,” says Ana, the owner of a private farm-to-table restaurant near Havana. “But now we need to be magicians and acrobats.” The communist island is facing its worst shortage of food since the 1990s. Finding ingredients was never easy in a place which imports around 70% of its food. Over the past year it has become nearly impossible. When grocery shops are empty, as is so often the case, Ana tries the internet or the black market, only to find that prices are prohibitively high. Farmers no longer want to sell produce to her, she says, as they need to eat it themselves.

“CUBANS HAVE always been resourceful,” says Ana, the owner of a private farm-to-table restaurant near Havana. “But now we need to be magicians and acrobats.” The communist island is facing its worst shortage of food since the 1990s. Finding ingredients was never easy in a place which imports around 70% of its food. Over the past year it has become nearly impossible. When grocery shops are empty, as is so often the case, Ana tries the internet or the black market, only to find that prices are prohibitively high. Farmers no longer want to sell produce to her, she says, as they need to eat it themselves.

The government blames the shortage of food mostly on sanctions imposed by the United States—sanctions which, on June 24th, the UN General Assembly voted to condemn, as it has done nearly every year since 1992. But since 2001 the sanctions have exempted food. Indeed, the United States is the largest exporter of food to Cuba, though last year those imports were at their lowest level since 2002.

Some external factors have affected the food supply. The jump in global food prices, which in the year to May surged by 40%, the largest increase in a decade, has made imports more expensive. But the main problem is the government’s lack of hard currency. Tourism, normally 10% of GDP, has atrophied because of the pandemic: whereas 4.2m people visited in 2019, just over 1m did last year, nearly all in the first three months of the year. Remittances have also suffered. Before covid-19, commercial airlines would operate as many as ten flights a day between Miami and Havana, all packed with cash-toting mulas. But now only a handful of flights go to Havana each week. In addition, this year’s harvest of sugar—one of Cuba’s main exports—was the worst in more than a century, as a result of drought (the dollar shortage also sapped supplies of fertiliser and petrol).

The government is trying desperately to eke out dollars and skimp on imported goods. Cubans can no longer buy greenbacks from state-operated exchanges at the airport. State-owned bakeries are replacing a fifth of the imported wheat flour they use in bread with substitutes made from home-grown corn, pumpkin or yucca, much to the dismay of consumers, who have complained that bread now tastes like soggy corn. The sale of biscuits has been limited in certain cities to cut back even more on imports of flour.

Since February, in a desperate attempt to collect hard currency, the government has required that foreigners pay for their seven-day mandatory stay in a state-owned quarantine hotel in dollars (since June, this has even applied to some Cubans). To earn more from its diaspora, the state also operates e-commerce sites through which Cubans abroad can pay in dollars or euros for food and gifts to be delivered to people on the island.

Indeed many Cubans abroad are trying to help their family members stave off hunger by sending their own care packages. But even these have become harder and more costly to post. Goods from the United States that once took two weeks to deliver can now take up to four months to arrive, as shortages of fuel and trucks in Cuba make the final leg of the delivery trickier.

Bungled policy responses have made things worse. On June 10th the Cuban central bank announced that, from June 21st, Cubans would not be able to deposit dollars into their bank accounts for an undisclosed amount of time. This is despite the fact that, in order to buy goods in state-owned shops, Cubans need to have a prepaid card loaded with dollars. They will now have to exchange their dollars for euros or other currencies, which involves a fee. Emilio Morales, the head of the Havana Consulting Group in Miami, thinks this was a way to scare people into depositing more before the deadline.

Rather than stabilise the economy, the policy is likely to do the reverse. Some exchange houses in Miami soon ran out of euros. Cuban banks were overwhelmed by queues of panicking people trying to deposit the dollars they needed to buy groceries. “Cuba has 11m hostages and is expecting Cuban exiles to pay their ransom,” says Mr Morales. Ricardo Cabrisas, the deputy prime minister, was recently in Paris negotiating another extension on the roughly $3.5bn of loans owed to foreign governments—the island has been in arrears since 2019. An ultimatum from creditors may help explain the government’s desire to hoover up greenbacks.

Despite making some attempts to liberalise the economy, the government is bafflingly poor at boosting agricultural production or wooing foreign investors. Firms producing food in Cuba earn only pesos, which have little value internationally, but must buy almost all their inputs abroad in a foreign currency. The government requires farmers to sell their harvest to the state at uncompetitive prices and imposes draconian rules on livestock management. Up until last month it was illegal to slaughter a cow before it had reached an advanced age, as determined by the state. Now farmers may kill them either to sell the meat or to eat it themselves. But before they do so, they must jump through a series of hoops, including certifying that the cow has produced at least 520 litres of milk a year. They are also not allowed to let their herd shrink overall, and so can only slaughter one cow for every three calves they add to it—a tall order in the long run, mathematically. As it is, Cuba is having trouble maintaining its existing cattle herd: last year, in the province of Las Tunas alone, more than 7,000 cows died from dehydration. Farmers have to complete paperwork and wait a week for approval, too. “The process of applying to eat a cow is enough to make you lose your appetite,” says a farmer in Bahía Honda.

Rural transportion
Zafra of 2016-20127

Cubans are no strangers to difficult times. Eliecer Jiménez Almeida, a Cuban filmmaker in Miami, was a child during the “special period” of hardship after the fall of the Soviet Union, and remembers how his grandmother sold her gold teeth in exchange for soap, just so that he and his siblings could take a bath. For him and for many Cubans, the question is not how many more of the same indignities their people can endure, but how much longer.

Discontent was slightly less likely when Fidel Castro was in power. He had charisma and mystique that neither his brother and successor, Raúl, nor Cuba’s current president, Miguel Díaz-Canel, can replicate. What is more, the Cuban diaspora is larger and wealthier and the internet has shown Cubans that many of their economic difficulties are created by their leaders, not the United States. The best way to stave off popular discontent would be to implement more and bigger economic reforms, at a faster pace, starting with farms and small businesses. It is a measure of Cubans’ disillusionment that the old revolutionary cry of “Hasta la victoria siempre” (On to victory, always) has largely been supplanted by the longsuffering “¿Hasta cuándo?” (How much longer?) ■

Fidel, cutting cane during the Zafra of 1970
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LAS TIENDAS RECAUDADORAS DE DIVISAS EN CUBA Y SUS ASPIRACIONES

Posted on November 21, 2019 by Arch Ritter

SIN UNA REFORMA FINANCIERA QUE SE HAGA ACOMPAÑAR DE UNA REFORMA PRODUCTIVA SERIA, VA A SER DIFÍCIL SALIR DE LA CRISIS POR LA QUE CUBA ATRAVIESA.

Omar Everleny Pérez Villanueva,  noviembre 19, 2019 

 

Corrían los primeros años de la década del 90 del siglo pasado y Cuba se adentraba en el llamado Período Especial en Tiempo de Paz. Para resistir y salir de la profunda crisis, las autoridades cubanas, especialmente Fidel Castro, anunciaban que se priorizarían las inversiones en determinados sectores estratégicos, entre ellos el turismo y la biotecnología.

Pero ambos requerían una importante inversión y demorarían en dar ingresos. Había entonces que buscar algún modo de captar divisas de manera más veloz. Y ahí apareció, en 1993, la despenalización de la tenencia de divisas extranjeras y la autorización para que la población adquiriera en tiendas en divisas los productos necesarios que ya estaban en falta en el circuito de ventas en moneda nacional (CUP). Se explicó que había mucha gente con divisas en su poder y que, simplemente, se estaba legalizando lo que ya era una realidad. Pero la motivación de recaudar divisas procedentes de las ayudas familiares tampoco se ocultaba.

Paralelamente, surgieron las Casas de Cambio, conocidas como CADECA, especialmente para que una parte de la población pudiese canjear las divisas que le habían enviado, adquirir CUP y así combatir el mercado negro en divisas. En aquel entonces, para hacer compras en las tiendas de divisas no era necesario canjearlas en CADECA por CUC. En las tiendas minoristas circulaba libremente el dólar, y más tarde hasta el euro en algunos polos turísticos. Durante esa época también se autorizó la posibilidad de abrir cuentas en divisas en bancos cubanos.

En Cuba había un referente de la existencia de tiendas en divisas, en las que solamente podían comprar los visitantes extranjeros: las tiendas en los hoteles conocidas como tiendas Caracol, aunque existían otras como Cubalse. También antes de los años 90 existieron billetes que permitían comprar en esas tiendas. Eran de diferentes colores: los había carmelitas, que recibían los estudiantes extranjeros en Cuba, o rojos para quienes estaban autorizados a estar en el extranjero por misiones o estudiando, entre otros. Se canjeaban en algunos bancos, sobre todo en el Banco Financiero Internacional (BFI): se entregaba la moneda extranjera y a uno le devolvían esos bonos.

Continuar: LAS TIENDAS RECAUDADORAS DE DIVISAS EN CUBA Y SUS ASPIRACIONES

Omar Everleny Pérez Villanueva

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CAN CUBA RE-INDUSTRIALIZE?

Posted on October 5, 2013 by Arch Ritter

By Arch Ritter, October 5, 2013

 Since 1989, and similar to the United States and Canada among other countries, Cuba has experienced a serious de-industrialization from which it has not recovered. The consequences of this are grave, including job and income loss, the loss of an important part of its economic base and rust-belt style urban decay. Cuba risks becoming a typical small Caribbean Island, exporting services and some resources, while importing almost all manufactures.[i]

New PictureThe causes of the collapse are complex and multi-dimensional. They were outlined in an earlier article available here:   Can Cuba Recover from its De-Industrialization? I. Characteristics and Causes.  In summary, the causes include:

  •   The ending of the subsidization from the Soviet Union resulting in an incapacitation of the manufacturing sector;
  •  The antiquated and uncompetitive technological inheritance from the Soviet era;
  •   Maintenance and re-investment was de-emphasized before 1989 and collapsed thereafter;
  •   Low investment levels. [Investment was 10.5% of GDP in 2008 in comparison with 20.6% for all of Latin America, according to UN ECLA];
  •  The dual monetary and exchange rate systems penalize traditional and potential new exporters that have received Moneda Nacional pesos at a rate of  CuP 1 = $US 1.00 from exports – while the relevant rate for Cuban citizens is 26 CuP = $US1.00;
  •   The prohibition of most small and medium enterprise for the last 50 years has blocked entrepreneurial trial and error and the emergence of new manufacturing activities;
  • Effective competition from Chinese manufactures imports, stimulated further by China’s undervalued exchange rate and Cuba’s over-valued exchange rate.

The accompanying chart illustrates the changes that have occurred Cuban manufacturing and some of its subsectors. Total manufacturing output excluding sugar in 2011 was 48.8% below the level of 1989 in terms of physical volumes. Many sectors experienced reductions in the 50% to 99% range. The exceptional success was pharmaceutical production which increased by 765% from 1989 to 2009, albeit from a low base.

What are the longer term consequences of “de-industrialization”?  Is it likely that the policy proposals of the Lineamientos approved at the VI Congress of the Communist Party of Cuba will lead to a recovery from this collapse? What can be done to reverse this situation?

 I.                   CONSEQUENCES OF THE COLLAPSE OF CUBA’S MANUFACTURING SECTOR

The consequences of the shrinkage of the manufacturing sector are serious. First, employment in the sector (including sugar) declined from 685,500 in 1989 to 530,800 in 2009 or to 77.4% of the 1989 level, a reduction of 32.6%. (ONE AEC, 2011 Table 7.3)

Second, labor productivity in manufacturing has fallen.  The volume of output has diminished more rapidly than employment. The 2009 level of output in the manufacturing sector (including sugar) was 44.9% of the 1989 level (a decline of 55.1%) but employment declined by 32,6%.  This means that labor productivity in manufacturing has also probably declined from 1989 to 2009, though this cannot be known for sure without knowing the values as well as the volumes of production in these years. 

Third, the importation of manufactures has risen sharply. Virtually all the shoes, clothing, textiles, household gadgetry and a lot of furniture are now imported. Indeed, one can purchase most plumbing supplies, electrical materials, dishes, pots and pans, household gadgetry and furnishings only for “Convertible Pesos” rather than the Moneda Nacional that people actually earn.

Paradoxically, visits to the various Tiendas por la Recaudacion de Divisas (TRDs or former dollar stores) which are the main source of household equipment and gadgetry, furnishings, clothing, foot-ware, plumbing materials, electrical items etc. is similar in one sense to visits to the major Big Box stores such as Walmart or Target in that the vast majority of the items for sale are imported from China. Walmart, Home Depot, Target and their ilk, make their mammoth purchases from China for all their stores in the country, obtaining massive economies of scale and quantity discounts. Has the China-Walmart Alliance helped to de-industrialized the United States?

One wonders if the procurement patterns for the large state store chains in Cuba are not unlike those of Walmart, pictured below. Does CIMEX, the major retailing conglomerate in Cuba make its purchases in the same way, providing for all its outlets in Cuba with single orders?  Is a CIMEX-China Alliance in Cuba echoing the China-Walmart Alliance in the United States and having similar results in avoiding smaller scale procurement purchases from Cuba or other countries?

Picture1The World According to Walmart’s Procurement Purchases

(One wonders if CIMEX procurement would be somewhat similar.)

A fourth result of Cuba’s de-industrialization is that it has lost much of the foundation on which diversified manufacturing activities could be developed in future. For example, Cuba has essentially lost the “clusters” of economic activities that once surrounded the sugar sector specifically and agriculture generally producing inputs and processing outputs.  Parts of the sugar-related manufacturing sector have largely shut down – notably the manufacture of cane harvesters and agricultural machinery and equipment as well as the production of replacement parts for the sugar mills. As illustrated in Chart 1, the production of machinery and equipment is at 0.4% of the 1989 level while that for metal fabrication is at 32.8%.

This situation prevails in many other areas of manufacturing as well. A glance at the Chart indicates the magnitudes of the collapse.

Fifth, the potential for the emergence of manufacturing for export markets has been impaired. It will be difficult to reconstruct the manufacturing activities for which Cuba might have been able to develop some comparative advantages.

 

II.                THE “LINEAMIENTOS” ON THE MANUFACTURING SECTOR.

The “Lineamientos de la Política Económica y Social del Partido y la Revolución,” approved on April 18, 2011 by the VI Party Congress include 25 guidelines on Industry. (Lineamientos de la Política Económica y Social del Partido y la Revolución.) Some of the guidelines are of obvious significance and would be of great usefulness if they can be implemented. These include

  •  “prioritizing” exports (Guideline No. 215) and maintenance  (220),
  • assuring inputs for the self-employment and cooperative sectors (217),
  •   emphasizing technical training ((132 and 138)
  •  the rationalization and restructuring of industrial capacity, including the sales, rental or usufruct of unused facilities to the self-employed (219).

Some specific industrial sectors are slated for emphasis, including pharmaceuticals (221(, nickel (224), natural medicines and dietary supplements (222) , information technology and electronics for export (226), fertilizers (230), rubber tires (231), construction materials (233), and metallurgy and machinery and equipment (234 236 and 237). Some of these seem reasonable and may have important roles to play in future manufacturing.

Elsewhere in the “Lineamientos” exchange rate and pricing considerations are mentioned, with the stated intention to move to a unified and realistic exchange rate but with no implementation as of September 2013.   

Liberalizing small enterprise and promoting larger co-operative forms of organization are now in process of implementation. For these two sectors, pricing is for the most part to be determined by the forces of supply and demand.  This may be an important step in permitting the emergence of new innovative enterprises. However, the continuing limits on size and professional activities impede the evolution of a diversified range of medium scale enterprise in higher tech manufacturing and related services.

If indeed the proposals of the “Lineamientos” were implemented fully and quickly, one could envisage the possibility of a turn-around for the manufacturing sector. So far, however, reforms in these areas have been cautious limited and slow.

III.             SOME POSSIBILITIES

 What might be the successful manufacturing sub-sectors in future? This section briefly considers some possibilities.

It is of course hard if not impossible to “pick the winners” in advance.  The most efficacious general approach for Cuba would be to establish a reasonable policy and institutional framework and let the winners emerge over time.  This would include such policies as unifying the monetary and exchange rate systems, liberalizing small and medium enterprise further, establishing a secure property rights system, consolidating the framework for the impartial rule of law towards enterprises, and a fair taxation system for Cuban-owned private sector enterprises, etc. (See  The Tax Regimen for the Mariel Export Processing Zone.regarding the unfairness of the tax system as regards Cuban-owned micro-enterprises.) Cuba is in the process of implementation in some of these areas though it still has a distance to go.

However, assuming that Cuba does establish an “enabling environment” for the emergence of a manufacturing sector, what might be the manufacturing opportunities for Cuba? This section tries to make a first sketch of Cuba’s main manufacturing sub-sectors and their future potential.

 

A.    Traditional Agro-Industries: Sugar, Tobacco and Rum.

The volumes of output in the sugar agro-industrial sector fell from 7 to 8 million metric tons of sugar per year in the 1980s to 1.8 million for the 2013 harvest. Perhaps the sector, focusing also on bio-fuels, can be reconstructed although now this would have to be almost from the ground up. Foreign – that is, Brazilian – technology, investible resources, managerial talent and entrepreneurship would be vital in this endeavor. But the old dysfunctional state enterprise model seems so entrenched that only successful implementation of dramatic institutional change as well as massive investment can bring it about.

Cuba has a major comparative advantage in cigars and a thriving agricultural and manufacturing base for future expansion. Market prospects are mixed but modestly positive on balance. The market for cigars in the high income countries may weaken in future as the baby boomers age further and become more concerned about their health. The cigar fad of the 1990s is unlikely to return in those countries with the same intensity.

On the other hand, cigars may become a status symbol for the males of the burgeoning middle classes of the emerging middle income countries of Latin America and Asia. Normalization of relations with the US will also increase demand.  

Conclusion?  Continue to promote this sector.  Also a suggestion: produce for export high quality but machine-made cigars at prices that are more affordable for a broader market. Cuba has priced itself out of the middle class cigar market.

The market for rum and alcoholic beverages has been strong.  Its future should also be positive again due to increasing demand in emerging countries and the United States after normalization.

 

B.     Food Processing

Cuba should have great potential in processing agricultural products. However, this depends on a thriving agricultural sector providing the raw materials. Unfortunately agriculture has been in steady decline especially since 1990. Some past exports such as citrus fruit have fallen out of the picture.

Cuba could have significant production for export markets of citrus products, tropical fruits, vegetables, and beverages. This would require major expansion of food production and is thus a longer-term possibility at this time. However, a a diversified range of agro-industrial possibilities could be considered, e.g. mango cultivation and juicing for export markets. [ii]

 

C.    Pharmaceuticals.

This sector has been dramatically successful since 1989, and has become a major export exporter to a growing range of countries. (See the accompanying chart.) This success should continue into the future.

However there are some downside risks. First, new drugs must continuously be developed because generic versions of existing drugs can be produced freely anywhere (read India and China) when patent protection runs out – if not before. This means that Cuba’s producers, like big pharmaceutical companies, face future death unless they innovate successfully. Second, some of the markets for Cuba’s pharmaceuticals are a type of ideological “sweet-heart” deal, e.g. purchases by Venezuela. These may be at risk in the longer term when the Cuba-Venezuela “special relationship” runs its course.

New Picture (2) 

D.    Light Manufactures

Some of the economic activities that have declined most seriously – from 70% to 90% in different cases – are footwear, textiles, clothing, and consumer products of leather, wood, paper, metal, rubber and plastic for household use (See Chart 1.) This seems tragic when one considers that even in the 1940’s, Cuba was a major producer of a range of products such as leather and rubber shoes, cotton and rayon textiles, rubber tires, soap, paint, clothing etc. (IBRD, Report on Cuba 1950, p.130.)  The collapse of much of Cuba’s light industry is of course paralleled by its corresponding collapse in Canada and the United States, with the resultant job-loss and urban decay in the rust-belt.

 It would be difficult for Cuba to reclaim many of these areas, given the incredible economies of scale and agglomerative economies that big countries such as China, India, and other Asian countries experience.

 

One can imagine niche-type markets for which Cuba could have success. For example, the manufacture of some lines of specialty women’s clothing, leather footwear, and Spanish-colonial style furniture might be possibilities. Already one sees surprising crafts-level innovation in a myriad of areas, focusing on hard-currency tourist markets. These provide some hope that middle-sized enterprises could emerge and develop new products for Cuban and foreign markets.

But for this to happen there would have to be the possibility that micro-enterprises could evolve into small and medium scale firms. This is still blocked – with the exception of cooperative forms of enterprises.

 

E.     Chemical and Petrochemical Products.

If Cuba emerges as a significant petroleum producer or refiner of petroleum imports, it is possible that it may develop a range of petrochemical products for national and regional markets. Some production and exports are likely to emerge from the new refinery complex in Cienfuegos. However, the competition in the region from established producers in the region such as the US gulf coast, Mexico, Trinidad and Venezuela is serious so the possibilities here seem limited.

Could the production or “mixing” of fertilizers – from imported potash, phosphates and nitrogen – be revived? Perhaps, though Cuba has no particular advantage in this area.

 

F.     Heavy Industry and Capital Goods Production

Heavy industry such as an iron and steel complex, metal fabrication, wire and tube making is unlikely to emerge in a significant way in Cuba due to lack of cheap energy sources at this time, the absence of relevant raw materials, absence of significant metal using industries within Cuba, the small domestic market vis-à-vis efficient scales of production, absence of relevant skills etc. This situation could change in future if low-cost sources of energy from off-shore petroleum were to be developed.

 

H.    Machinery and Equipment

Cuba has produced some agricultural transport equipment, namely cane carts, since early colonial times. More recently, it produced heavy can harvesters such as the one in the adjoining photograph.

At this time, Cuba has lost the agricultural foundation for the production of machinery and equipment for the agricultural sector, though there may be some niches where possibilities exist. Brazil seems likely to capture much of this market. There may be some niche products that could emerge however.

Chances for Cuba of capturing automotive parts, batteries, rubber tires etc. seem slim and assembly is out of the question given the lack of the relevant cluster of economic activities on which these would be based and the great economies of scale in established producers elsewhere.   

 

I.        Electric and Electronic Equipment

The assembly of some electric or electronic products occurs now in a minor way and could perhaps be expanded. However, virtually all of the components would have to be imported so that domestic value added would be limited. Again, competition from abroad, notably from China will be difficult to overcome due to its huge advantages noted earlier.

 

J.      The Mariel Export Processing Zone

The Mariel EPZ creates some new possibilities for Cuba. It is possible that China (being wooed by Cuba with a “Mariel mission” visiting that country in September 2013), Brazil and possibly other countries establish assembly, light fabrication or bulk-breaking activities in the EPZ. This is certainly the purpose of the highly generous tax treatment provided to foreign investors, namely a “Zero” profits tax rate for 10 years with presumably full expatriation of profits and a rate of 12.5% after 10 years. (See The Tax Regimen for the Mariel Export Processing Zone.)

 

IV.             CONCLUSION

To revive Cuba’s manufacturing sector will be difficult. The loss of so much industrial capacity over the last quarter Century has weakened the foundation on which such a recovery could be based. There are a few promising sectors, most notably pharmaceuticals, food products, and some niche fabrication activities. But other most sub-sectors appear generally to be un-promising. Perhaps the Mariel Export Processing Zone will have some beneficial impacts.

What is most needed is the establishment of an “enabling environment” of company law, liberalization of small and medium enterprise, a reasonable tax regimen for Cuban private sector enterprises and of the monetary and exchange rate systems. Some of this was recognized in the “Lineamientos.” But there is still some distance to go.

Cane Harvester October 1993 002Cuban-Manufactured Cane-Harvester Pausing on the Highway, November 1994; Photo by Arch Ritter. Was thuis the last Cuban-made Harvester?

[i] The industrial sector has not yet been examined as in as much depth as some other economic areas such as agriculture. However, analysts at the Centro de Estudios sobre la Economia Cubana (CEEC) in Havana, notably Ricardo Torres Perez, have been turning their attention to this area.

[ii] For example, Canada imports growing volumes of several varieties of mango juice from the Republic of South Africa. Cuba could share in such markets. Again, normalization with the United States in time will be of benefit in providing a large near-by market.

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Cuba lets athletes compete in foreign leagues

Posted on September 27, 2013 by Arch Ritter

By ANNE-MARIE GARCIA;  Associated Press Sep 27, 7:55 AM EDT

HAVANA (AP) — Cuba announced Friday that island athletes will be allowed to sign contracts to compete in foreign leagues, a shift from decades of policy that held professional sports to be anathema to socialist ideals.

The measure promises to greatly increase the amount of money baseball players and others are able to earn, and seems geared toward stemming a continuing wave of defections by athletes who are lured abroad by the possibility of lucrative contracts, sapping talent from national squads.

It was not immediately clear if the ruling would let Cuban baseball players jump to the U.S. Major Leagues without restrictions at home or under U.S. laws that restrict money transfers to the communist-led island. Athletes will be eligible to play abroad as long as they fulfill their commitments at home, the Communist Party newspaper Granma reported. “It will be taken into account that they are in Cuba for the fundamental competitions of the year,” Granma said.

The paper said the decision was approved at a recent session of the Council of Ministers, which is headed up by President Raul Castro. “International experiences, including 10 sporting laws of various Latin American nations, were studied,” it added.

Until now, few Cuban baseball players have been permitted to play abroad. Alfredo Despaigne spent this summer with the Pirates of Campeche, Mexico. Previously, Omar Linares played in Japan.  In the 1990s, some athletes in other sports such as volleyball played in European leagues. A number of athletes, especially baseball players, have defected in recent months and years. They include Yasiel Puig, who signed a multimillion-dollar contract with the Los Angeles Dodgers.

Professional sports were outlawed under Fidel Castro in 1961, two years after the Cuban Revolution.

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The Tax Regimen for the Mariel Export Processing Zone: More Tax Discrimination against Cuban Micro-enterprises and Citizens?

Posted on September 26, 2013 by Arch Ritter

 By Arch Ritter

The Mariel Export Processing Zone (EPZ) is the second attempt since May 1997[i] to set up an EPZ that will promote foreign investment and thereby generate jobs, income, domestic value added and foreign exchange earnings for Cuba. This new container port facility and industrial park will free Havana Harbor for restoration and regeneration ultimately for recreational rather than industrial purposes. One might expect that Brazilian and Chinese enterprises – private and state-owned- will seize the opportunity to operate in Mariel vigorously with an eye for exports or re-exports to the Caribbean region.

The regulation and tax regimes for the Mariel EPZ were announced on September 23, 2013 (Marc Frank, Reuters, September 24 2013). The tax regime for the foreign firms operating in the Mariel EPZ is generous. It includes:

  •    a ten-year holiday from paying a tax on profits  and
  • presumably the full ex-patriation of profits;
  •   a 12% tax rate after 10 years;
  • the normal Cuban income tax rate for foreign workers
  •   a 14% (of wage) payment for workers’ social security;
  • zero tax on imported equipment; low duties on imported materials; and
  •  0.5% for EPZ maintenance.

These provisions should provide a strong incentive for foreign firms to locate in the EPZ. On the other hand, this tax regime in itself will not generate a huge amount of foreign exchange revenues for the Cuban Government.

The down-side of the tax regime for foreign investors and the major earner of foreign exchange for the government will be the hidden taxation involved in the hiring of labor. EPZ enterprises, like those in joint enterprises will have to pay hard currency to a state company to cover the wages and salaries of Cuban workers at a rate around $US 1.00 = 1 peso (CuP in Moneda Nacional) while the rate that is relevant for Cuban citizens is $US 1.00 = 26 pesos (CuP). The government can then sell the hard currency (“convertible pesos” or CuCs) at the rate of 1CuC = 26 CuP, meaning a profit on each CuC of 25 CuPs. This profit to the government is in effect a 96% tax rate (1 – 25/26 = 0.038) .  This counterbalances to some extent the generosity of the rest of the tax regime for the EPZ firms.

In the words of Marc Frank:

“However, one of the main complaints of foreign investors in Cuba has not changed: that they must hire and fire through a state-run labor company which pays employees in near worthless pesos while investors pay the company in hard currency. Investors complain they have little control over their labor force and must find ways to stimulate their workers, who often receive the equivalent of around $20 a month for services that the labor company charges up to twenty times more for.” Frank, Reuters, September 23, 2013

 EPZ enterprises also would prefer to operate with a reasonable and realistic exchange rate and the power to hire labor directly rather than to go through the state labor company.

The accompanying table compares the tax regimes for micro-enterprise, foreign firms in joint enterprises and EPZ enterprises. While the reforms of the micro-enterprise tax regime in 2010-2011 reduced the discrimination favoring foreign enterprises, but did so only slightly. For foreign firms the tax base is total revenues minus all costs of production and investment. In contrast, for micro-enterprises the tax base is total revenue minus arbitrary and limited maximum allowable levels of input costs ranging from 10 to 40 percent depending on the activity, and regardless of true production costs. As a result, for Cuban micro-enterprises the effective tax rate can be very high and could exceed 100% while the effective tax rate for foreign enterprises is exceedingly low. Moreover, investment costs are deductible from future income streams for foreign firms, this being the normal international convention. But for Cuban micro-enterprise, investment costs are deductible only within the 10 to 40% allowable cost deduction levels for the current year. 

The highest tax rate or bracket for domestic micro-enterprises is 50% while that for foreign firms in joint-enterprises is 30% generally but 50 % for mining (namely for Sherritt International). The Mariel EPZ rate is 0.0% for 10 years and 12% thereafter.

The EPZ firms can import equipment and materials at 0.0% import duty. For many imported inputs required for micro-enterprises, the sales tax they pay in the “convertible currency” stores is 140%, though wholesale markets are to appear before long providing imported inputs at prices that may be a good deal lower.

All in all, the differential tax regimes represent a surprising type of discrimination against Cuban citizens and in favor of the foreign firms in joint enterprises or the Mariel EPZ. The tax system permits very low taxes for the foreign owners of enterprises investing in the EPZ. IN contrast, Cuban micro-enterprises face a daunting tax regime.

From the perspective of Cuba’s national interest, the tax regime has another weakness. This is the heavy but hidden taxation on the payment of labor in the EPZ. The effective 96% tax operating through the dual exchange rate system does generate revenue for the Government. However, by making labor relatively expensive for the EPZ firms, it will provide a disincentive to job creation in the EPZs. This is a central objective of Cuban economic policy at this time as it tries to absorb up to 1 million workers that it considers to be redundant in the state sector of the economy.

Moreover, while the wage compensation to Cuban workers is pitifully low under the dual exchange rate system, the cost to employers is high. Under the wage payment systems of the previous EPZs, illustrated in the Table 2 below, the wage costs to employers were well above neighboring countries in the Caribbean region. This may well persist under the tax arrangements for the new Mariel EPZ.

[i]Three EPZs were established in 1997 at Mariel, Berroa, some ten kilometers from the port of Havana  and Wajay by the airport outside Havana. Their performance was mediocre; hence the new approach for a “Super-EPZ” at new container port at Mariel.

Table 2.Source: Larry Willmore, Export processing Zones in Cuba, in A. Ritter (editor). The Cuban Economy. University of Pittsburgh Press 2004.

 

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Cuba bids to lure foreign investment with new port and trade zone

Posted on September 25, 2013 by Arch Ritter

By Marc Frank

Original Article Here:   Mariel

Mariel Harbor

HAVANA, Sept 23 (Reuters) – Cuba published rules and regulations on Monday governing its first special development zone, touting new port facilities in Mariel Bay in a bid to attract investors and take advantage of a renovated Panama Canal.

The decree establishing the zone and related rules takes effect on Nov. 1 and includes significant tax and customs breaks for foreign and Cuban companies while maintaining restrictive policies, including for labor.

Cuba hopes the zone, and others it plans for the future, will “increase exports, the effective substitution of imports, (spur) high-technology and local development projects, as well as contribute to the creation of new jobs,” according to reform plans issued by the ruling Communist Party in 2011.

The plan spoke positively of foreign investment, promised a review of the cumbersome approval process and said special economic zones, joint venture golf courses, marinas and new manufacturing projects were planned. Most experts believe large flows of direct investment will be needed for development and to create jobs if the government follows through with plans to lay off up to a million workers in an attempt to lift the country out of its economic malaise.

The Mariel special development zone covers 180 square miles (466 square km) west of Havana and is centered around a new container terminal under construction in Mariel Bay, 28 miles (45 km) from the Cuban capital.

The zone will be administered by a new state entity under the Council of Ministers, and investors will be given up to 50-year contracts, compared with the current 25 years, with the possibility of renewal. They can have up to 100 percent ownership during the contract, according to Cuba’s foreign investment law.

Investors will be charged virtually no labor or local taxes and will be granted a 10-year reprieve from paying a 12 percent tax on profits. They will, however, pay a 14 percent social security tax, a 1 percent sales or service tax for local transactions, and 0.5 percent of income to a zone maintenance and development fund.

Foreign managers and technicians will be subject to local income taxes. All equipment and materials brought in to set up shop will be duty free, with low import and export rates for material brought in to produce for export.

However, one of the main complaints of foreign investors in Cuba has not changed: that they must hire and fire through a state-run labor company which pays employees in near worthless pesos while investors pay the company in hard currency.

Investors complain they have little control over their labor force and must find ways to stimulate their workers, who often receive the equivalent of around $20 a month for services that the labor company charges up to twenty times more for.

And investors will still face a complicated approval policy, tough supervision, and conflict resolution through Cuban entities unless stipulated otherwise in their contracts. And they must be insured through Cuban state companies.

MARIEL PORT

The Mariel container terminal and logistical rail and highway support, a $900 million project, is largely being financed by Brazil and built in conjunction with Brazil’s Grupo Odebrecht SA. The container facility will be operated by Singaporean port operator PSA International Pte Ltd. The terminal is scheduled to open in January.

Future plans call for increasing the terminal’s capacity, developing light manufacturing, storage and other facilities near the port, and building hotels, golf courses and condominiums in the broader area that runs along the northern coast and 30 miles (48 km) inland.

Mariel Bay is one of Cuba’s finest along the northern coast, and the port is destined to replace Havana, the country’s main port, over the coming years. The Mariel terminal, which will have an initial 765 yards (700 meters) of berth, is ideally situated to handle U.S. cargo if the American trade embargo is eventually lifted, and will receive U.S. food exports already flowing into the country under a 2000 amendment to sanctions.

Plans through 2022 call for Mariel to house logistics facilities for offshore oil exploration and development, the container terminal, general cargo and bulk foods facilities. Mariel Port will handle vessels with up drafts up to 49 feet (15 meters) compared with 36 feet (11 meters) at Havana Bay due to a tunnel under the channel leading into the Cuban capital’s port.

The terminal will have an initial capacity of 850,000 to 1 million containers, compared with Havana’s 350,000.

Leaving Mariel, April 1980

April 23, 1980: Arriving in Key West  on the shrimp boat Big Babe.

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Remittances Drive the Cuban Economy

Posted on June 11, 2013 by Arch Ritter

By Emilio Morales and Joseph L. Scarpaci, Miami (The Havana Consulting Group).— Fidel Castro’s government reluctantly accepted remittances from abroad in 1993 when it realized it needed access to hard currency to survive.

It was a devastating ideological blow at the beginning of the so-called ‘Special Period in a Time of Peace’ because it revealed that the Cuban exile community had become a lifeline for the island. Suddenly, U.S. dollars started inundating the island and would never leave. Both the Cuban society and the exile community were startled by this bold move.

The former Cuban leader probably never imagined that the forced opening up to dollars was going to become the most efficient driver in the economy over the last 20 years. Not a single Cuban economist foresaw that outcome. Today, remittances reach 62% of Cuban households, sustain about 90% of the retail market, and provide tens of thousands of jobs.

Money sent from overseas far exceeds the value of the once powerful sugar industry which, in 1993, began a huge decline from which it has not recovered. Remittances in 2013 surpass net profits from tourism, nickel, and medical products manufactured by the Cuban biotech industry.

Table 1. Remittances versus Other Sources of Hard Currency in Cuba, 2012 (in millions of US dollars)

No.

Source

2012

1

Remittances received in cash

$2,605.12

2

In-kind remittances

$2,500.00

3

Total remittances

$5,105.12

4

Tourism revenues

$2,613.30

5

Nickel exports

$1,413.00

6

Pharmaceutical exports

$500.00

7

Sugar exports

$391.30

Data sources: Calculated by The Havana Consulting Group, based on their data and open-source statistics published by the Oficina Nacional de Estadísticas e Información (ONEI), Havana.

The table above shows that remittances ($5.1 billion) outstrip the leading four sectors of the Cuban economy combined ($4.9 billion). Moreover, the figures for items 4 through 7 do not take into account expenses incurred in generating those gross revenues (i.e., costs of processing sugar, manufacturing drugs, food imports, etc.). Sending remittances does not cost the Cuban government money, but it circulates throughout he economy and supports most Cubans in some way.

White House Policies Trigger Growth in Remittances

Barack Obama’s arrival in the White House has directly influenced the increase in money being sent to Cuba. In the past four years, $1 billion USD of remittances have infused the Cuban economy.

Cash remittances in 2012 reached a record $2.61 billion USD; a 13.5% increase over 2011.

In other words, cash remittances outweigh government salaries by 3 to 1. The current monthly mean salary according to ONEI (the official government statistics agency) is 445 Cuban pesos, or the equivalent of just under $19 USD. Today, the economically active work force is 5.01 million workers, of which about 80% (4.08 million) draw state paychecks, whereas the balance is self-employed, agricultural, or cooperative workers.

If we use the official exchange rates that one Cuban convertible peso (CUC) equals 24 pesos (CUP) or one US dollar, the annual payout for state workers is three times less than the volume of money that Cuban émigrés send to family back home. Include in-kind remittance contributions (gifts, appliances, clothing, etc., brought to Cuba during visits), and the ratio leaps to 5.5 to 1.

Behind this growth in sending money to Cuba is the opening up of travel to Cuba as well as eliminating restrictions on sending money there. In 2012, just over a half a million Cubans residing abroad visited Cuba, making them the second largest tourist group in the island’s market; only Canadians (1.1 million visits) surpass them.

Out-migration from Cuba –about 47,000 annually on average over the past decade or nearly a half million émigrés—is also a contributing factor because those who have most recently left the island are the ones most inclined to send money back home. That was not the pattern with the original exile community in the 1960s; sending dollars to the island was forbidden back then.

We also need to acknowledge that several reforms introduced by the Cuban government in the past three years have encouraged remittances. This cash infusion helps to start home restaurants (paladares), B&Bs, car rentals, and more recently the buying and selling of private cars and real-estate. These businesses are aided by the 1.6 million cell phones in use today –available to the general public only since 2007—of which 70% are paid for by Cubans living off the island.

Never at a loss to encourage remittances, the Cuban government announced just last month the opening of 118 Internet stations that charge very high hourly rates. The new cyber cafés will initially cluster in the tourist poles across the island and the provincial-capital cities.

At the present, then, the role the Cuban diaspora plays in developing the island’s economy has never been greater, despite the restrictions on how and where money can be invested. However, the short term is unlikely to witness a greater influx of capital beyond the diaspora’s giving. Witness the failures in recent offshore gas and oil oil drillings that have come up ‘dry’ and the political and economic crisis in post-Chávez Venezuela is mired. This may create a broader space for the exiles to have a more direct hand in rebuilding the country.

Like it or not, Cuban exiles carry economic clout on the island. They have a lot of skin in the game; some of it is economic, and a lot of it is love of family. Their role in shaping the lives of many will be transformative in years to come, and on both shorelines that straddle the Florida Straits.

Last Updated (Tuesday, 11 June 2013 04:20)

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Richard Feinberg: The New Cuban Economy What Roles for Foreign Investment?

Posted on December 10, 2012 by Arch Ritter

A new study by Richard Feinberg on direct foreign investment in the Cuban context has just been published by the Brookings Institution.  This is the best recent study on the topic and is well worth a read. The Introduction and the recommendations that are relevant for the Cuban Government are presented below.

The complete report is located here:  Feinberg, The New Cuban Economy, What Role for Foreign Investment 2012

1. Introduction

The Cuban revolution defined itself in large measure in terms of what it was not: not a dependency of the United States; not a dominion governed by global corporations; not a liberal, market-driven economy. As the guerrilla army made its triumphal entry into Havana and the infant revolution shifted leftward, a hallmark of its anti-imperialist ethos became the loudly proclaimed nationalizations of the U.S.-based firms that had controlled many key sectors of the Cuban economy, including hotels and gambling casinos, public utilities, oil refineries, and the rich sugar mills. In the strategic conflict with the United States, the “historic enemy,” the revolution consolidated its power through the excision of the U.S. economic presence.

For revolutionary Cuba, foreign investment has been about more than dollars and cents. It’s about cultural identity and national sovereignty. It’s also about a model of socialist planning, a hybrid of Marxist-Leninism and Fidelismo, which has jealously guarded its domination over all aspects of the economy. During its five decades of rule, the regime’s political and social goals always dominated economic policy; security of the revolution trumped productivity.

Fidel Castro’s brand of anti-capitalism included a strong dose of anti-globalization. For many years, El Comandante en Jefe hosted a large international conference on globalization where he would lecture thousands of delegates with his denunciations of the many evils of multinational firms that spread brutal exploitation and dehumanizing inequality around the world. Not surprisingly, Cuba has received  remarkably small inflows of foreign investment, even taking into account the size of its economy. In the 21st century, the globe is awash in trans-border investments by corporations, large and small. Many developing countries, other than those damaged by severe civil conflicts, receive shares that significantly bolster their growth prospects.

The expansion of foreign direct investment (FDI) into developing countries is one of the great stories of recent decades, rising from $14 billion in 1985 to $617 billion in 2010.1 While FDI2 cannot substitute for domestic savings and investment, it can add significantly to domestic efforts and significantly speed growth.

Today’s ailing Cuban economy, whose 11.2 million people yield the modest GNP reported officially at $64 billion3 (and possibly much less at realistic exchange rates), badly need additional external cooperation— notwithstanding heavily-subsidized oil imports from Venezuela. As with any economy, domestic choices made at home and by Cubans will largely determine the country’s fate. Yet, as Cubans have been well aware since the arrival of Christopher Columbus, the encroaching international economy matters greatly; it can be a source of not only harsh punishments but also great benefits.

In the Brookings Institution monograph Reaching Out: Cuba’s New Economy and the International Response, I explored the modest contributions already being made by certain bilateral and regional cooperation agencies and the larger potential benefits awaiting Cuba if it joins the core global and regional financial institutions—namely the International Monetary Fund, the World Bank, the Inter- American Development Bank, and the Andean Development Corporation.

This sequel explores the contributions that private foreign investments have been making, and could make on a much greater scale, to propel Cuba onto a more prosperous and sustainable growth path.

Sol Melia Havana

6. Policy Recommendations

It is time for Cuba to extract its rightful share of benefits from participating actively in the global economy. But the Cuban economy has a long way to go before most foreign investors would be willing to take significant risks on the island. Most importantly, Cuba needs to overcome its animosities and fears and reach a national  consensus that, as a small island economy, its economic future depends upon a healthy engagement with the international economy. As many other proud nations have discovered, it is possible to accept FDI without sacrificing national sovereignty and governance capacity. On the contrary, FDI can provide resources—including investment capital and fiscal revenues—that enhance national choices.

If Cuba had allowed FDI inflows equal to 5 percent of its GDP during the last decade, or roughly $2.5 billion a year, Cuba would have supplemented its domestic savings by some $25 billion.  This would have enhanced its ability to recapitalize its productive base while preserving and upgrading the quality of its social services. The Cuban government should send clear signals—including to its own bureaucrats—that it has moved beyond ambiguity and distrust toward a reasoned appreciation of the benefits that foreign investment can bring to a small island economy.

To begin to gradually improve the investment climate, Cuba could:

• Complement the 2011 reform guidelines with a coherent national competitiveness strategy that announces a prominent role for foreign investment. In designing this forward-looking strategy, the government should consult with existing joint venture executives.

• Completely overhaul the investment approval process, making it more transparent and much faster, as promised in the 2011 guidelines. To facilitate rational decision making by both parties, representatives of proposed investments should have ready access to responsible government officials. So that potential investors can better design projects to meet Cuban national priorities, official rulings should be accompanied by robust explanations. Smaller investments should be placed on a fast-track authorization process.

• Detail the approval criteria for the new FTZs, with its fiscal incentives, and include a coherent list of priority clusters.

• Remove the fixed-time horizon facing investments outside of the FTZs, which promotes myopic behavior and disinvestment as the deadline approaches.

• Not exclude multinationals that serve the domestic market simply because they do not readily fit into a national export promotion strategy. Cuban firms cannot replicate the massiveR&D and product innovation pipelines that characterize international giants such as Nestlé or Unilever, and whose outputs Cuban consumers will demand.

• Build forcefully on the successful strategy of selling quality Cuban products through established international marketing machines. This can be accomplished, for example, by forging alliances among pharmaceutical giants with global reach to make patented Cuban medical innovations available to consumers worldwide.

• Encourage FDI to integrate local firms into their supply chains. An inter-ministerial committee should build an integrated strategy to assist local firms to meet acquisition requirements. Include private businesses and cooperatives in an ambitious trade facilitation strategy that targets small and medium enterprises.

• Permit foreign investors to form a business association that would allow them to engage in a constructive dialogue with the government. Encourage investors to adapt corporate responsibility practices that observe Cuban laws and national goals and serve corporate stakeholders, including workers, communities, and consumers.

• Sharply reduce the implicit tax on labor, to the benefit of Cuban workers and the competitiveness of exports. Eventually dismantle the dual currency labor payment system altogether.

• Recast the anti-corruption campaign to focus on root causes: low wages and nontransparency.This can be done, for example, by shining sunlight on the procurement procedures of government entities and SOEs. Combating corruption in both the public and private spheres is critical to sustainable economic development, but properly structured incentives, not arbitrary prosecutions, are the more sustainable pathway toward ethical business practices.

• Publish much more data and analysis on the capital account and on FDI, including impacts on savings and investment, employment and wage levels, supply chain integration, and net export earnings.

Cuba could benefit tremendously from learning from other nations that have successfully extracted benefits from foreign investment. The international financial institutions (IFIs) offer a cost-effective short-cut to assess the applicability of comparative country  experiences. As argued in Reaching Out: Cuba’s New Economy and the International Response, now is the time for the international development community to engage in Cuba and support its incipient economic reform process.

Under their own new guidelines, the international financial institutions are capable of working within Cuban national priorities while they contribute their unique bundles of knowledge and capital.  With regard to FDI, IFIs are particularly well equipped. Furthermore, the presence of the IFIs would add credibility to Cuban investment commitments and to contract enforcement—important ingredients in establishing a more secure investment climate in a changing Cuba.

For these reasons, Cuba should signal to the IFIs its interest in entering a gradual path toward receiving, first technical assistance (studies, training) and eventually full membership.

Sherritt International, Cuba

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