Cuba, competition and the Caribbean

The View from Europe
By David Jessop
Cuba, competition and the Caribbean
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 others in 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 challenging 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 Raúl 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 Raúl 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 per cent 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 nonfarm 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 out-compete 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 fifty 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 the reality of market economics to the needs of its unique
social model should therefore be a moment not for hand wringing in the Caribbean, but a change to
be welcomed if as seems likely it portends further gradual and stable change.
Whether, however, what has been agreed will transform Cuba or as seems more likely, as with much
of the Cuban economic reform process, may involve a kind of learning through doing process rather
than change through planning, remains to be seen.
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
which, by placing pressure on the international banking system and individuals in Europe and
elsewhere, is apparently seeking 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 deepening ties with Russia; and its desire to see stability return to Venezuela.
David Jessop is the Director of the Caribbean Council and can be contacted at
david.jessop@caribbean-council.org
Previous columns can be found at www.caribbean-council.org
April 6, 2014