Havana’s International Fair and betting on Cuba’s new economy
HAVANA – The International Fair of Havana attracts a good number of foreign companies who are suppliers and investors every year. Most recently, the fair’s attractiveness has trended upward due to the Cuba’s new Foreign Investment Law (Law 118 of 2014). You can also add the annual presentation of a new portfolio of investment opportunities and it’s easy to see what draws these companies to the fair. And a minimal review of the government’s economic policy shows that the attraction of foreign investment is practically the only relevant area where there have been no setbacks since the reform was launched.
It can be said that the country is betting on this to help improve the disappointing economic performance. It is a surprising turn if you remember the scene of a few years ago. Whether it generates the desired effect, or that it is a strategic move is another matter.
Foreign investment is a policy area that is at the center of debate in most developing countries. Historical experience reveals that a few states have been highly successful in using it as a key lever of development, while a majority exhibits mixed results.
Contemporary analyzes of the role of Foreign Direct Investment (FDI) in developing countries reveal some fairly clear lessons: The paradigm that FDI is the panacea of development has been left behind; any positive effect is neither automatic nor spontaneous. The benefits of the activity of multinationals in a given country depend to a great degree on their level of involvement in the productive fabric of the receiving economy; that is, on the volume and quality of the relationships established with domestic companies, beyond the direct partner (if it exists).
In too many cases countries do not perform adequate cost-benefit analysis. It has been proved that the resources donated by the host in terms of tax deductions, financing on favorable terms and investments induced in infrastructure and human capital far outweigh the global revenues for the host country. On the domestic side, positive externalities and other effects depend on the absorptive capacity of companies in the host country, and are not obtained spontaneously. On the contrary, they depend on an expensive process of learning and capacity building. Entities are encouraged only if there are real benefits for their activity.
The Cuban productive system is dominated by state enterprises, and a relatively small cooperative and private sector, confined mostly to very basic activities with little knowledge content and little possibility of reaching new markets. Very few ventures survive. The participation of foreign capital in the non-state sector is not foreseen, at least formally, although the possibility of considering it for cooperatives was admitted.
The foreign investment’s role is a relatively new phenomenon in the Cuban context. Although in fact it took off with some force in the Nineties, at that time there was a high degree of discretion and graduality in attracting new companies, which led to the consolidation of a relatively restrictive and selective process. One of the most important consequences of this decision was that the development capacity of the different functionaries and institutions directly linked to the promotion of foreign investment was slow and varied in the different ministries of the country. Where there was a clear indication of progress certain negotiation capacities were made possible. Perhaps the clearest example in this regard is the Ministry of Tourism and the companies associated with it.
The arrival of foreign investors to Cuba runs into a reality that presents notable challenges. The information needed to make a diagnosis of the economic conditions of the country and its growth prospects is scattered and insufficient. This is aggravated by the absence of updated information on Cuba in most of the international databases. This results in the country not being included in the most important economic performance evaluation scales in the world, such as the Ease of Doing Business Index, Global Competitiveness Index or Innovation Index, just to mention the best known. The scarcity of data is even worse when it comes to specific sectors or activities.
In turn, the existence of non-conventional mechanisms for the formation of key prices (exchange rates, wages) and the allocation of production factors generate significant distortions in these areas, which are aspects of first importance for the decision to implement in any market. Management of the exchange rate, for example, has a direct impact on the expected return on investment and on the effective ability to repatriate dividends. Up to now, ad hoc solutions have been tested, but these are not the solution to the problem.
Once in the field, the foreign investor must deal with a decision-making process whose transparency can be significantly improved, which would help build trust. It is, in addition, generally dilated and highly bureaucratic and administrative, and this contributes to raising the opportunity cost of time and the resources invested. It betrays discretion, and at times, shows little seriousness. One’s proposal determines, to a large extent, the type of partners that end up getting involved. That partner should not be viewed as the enemy that must be defeated in a negotiation, but one who will share the risks of any investment, and much more in the Cuban market.
Such a small country should not have so many priorities from the productive point of view. Until today, there is no clear definition in relation to fundamental needs and what is considered a priority sector. At least three official documents use different taxonomies with inaccurate sector definitions (Foreign Investment Law, the 2030 National Development Plan, and the Portfolio of Investment Opportunities — at the project level). The possibility that Cuban entities (of any kind) can establish a commercial relationship with foreign counterparts is subject to great legal, administrative and economic restrictions (from the operation in different currencies, etc.). The extreme example in this case would be the private sector (self-employment). There is no documented successful experience of FDI in which national entities have not been promoted with equal or greater effort.
Cuban state-owned companies operate in an environment that assumes that in practice there are few or no incentives to take advantage of the opportunities that would promote the arrival of a foreign investor. Much less to strategically plan the physical investments and human capital that would make them possible. One can’t seriously talk about scarcity of resources when the possibilities at home are not fully used. This country’s greatest asset is the talent and energy of its citizens. How can you attract the best entrepreneurs in the world when there’s not plan for those you have at home? This is an insurmountable contradiction to the effects of long-term economic development.
Sanctions from the United States are a formidable obstacle, but it is advisable to focus on what can be improved based on our own decisions. Without a clear vision of the development strategy, it is difficult to find the right place for FDI. Cuba competes in the world market of foreign capital, and we have formidable contenders in the area. To those who feel encouraged to reach our shores, we say, welcome!
Dr. Ricardo Torres is a professor of economics at the University of Havana.
