Domingo, 23 de Octubre de 2016
18:00 CEST.

Foreign Investment Law: More Apartheid

At first glance, the Cuban Foreign Investment Law (Law 118, April 2014) seeks to attract capital to the country in order to raise its production level, especially as regards exportable products. Attracting foreign capital is perfectly legitimate for any economy, but in the context of Cuba several observations are in order.

All countries, even the richest, benefit from foreign investment; that is, the flow of capital from other nations to increase the productive capacity of the country (direct investment) or acquiring existing properties or equity instruments (financial investment). The Cuban economy needs these forms of investment, but especially direct investment, not only to solve its chronic production crisis, but for other reasons, all of them vital. One of them is to create an investment capacity capable of increasing the nation's meager capacity to generate resources for investment. That is, the Cuban economy under the Castro regime has been unable to generate investments sufficient to ensure the replacement of those in place when they were expropriated, or to create enough well paid jobs. In other words, so-called Cuban socialism has not even been able to bring about the "simple reproduction" (Marxist term) of its economy, which should scandalize those who still believe in this type of economic organization.

Another reason to attract foreign capital to Cuba goes beyond what is seen with the naked eye, and consists of attracting managerial talent of all kinds to an economy that not only lost a catastrophic proportion of its endowments of capital - physical financial, human and social - but also their management capacity.

Expropriations of companies in 1960 were followed by a massive loss of managerial, administrative and technical staff, which affected all their operational aspects. These operations included their technical and production processes; the management of personnel and wages; financial administration and the handling of investments; and the organization of sales, inventory, distribution and marketing, among others. To keep the businesses running and prevent production stops, and the consequent mass unemployment they would entail, the expropriations were followed by the replacement of executive staff with people politically and ideologically aligned with the revolutionary government. But the new executive staff generally lacked their predecessors' technical and administrative qualifications, the effect being immediate drops in production and efficiency levels at virtually all businesses. This deterioration of the nation's productive capacity was the main reason that Cuba would need substantial subsidies from the Soviet Union, first, followed by Venezuela. Over time this dynamic of managerial degradation, in which loyalty to the Government took precedence over the quality of administration, worsened, and Cuba gradually lost the culture of production efficiency that had made it solvent and relatively prosperous until 1959.

This was part of the legacy of inept economic  management that Fidel Castro dumped on his brother Raúl. The Cuban economy now must recover not only a portion of the investments that have been mishandled and lost due to more than 50 years of administrative negligence, but also restore a substantial part of its degraded administrative capacity. Otherwise Cuba will once again lose the resources invested in physical capital, as it not complemented by the technical and managerial human capital needed – as has already occurred in several cycles since the beginning of the Castro era. Hence, the Foreign Investment Law not only serves to attract physical capital, but also the human capital to manage it, as has been the case with foreign investments in Tourism, which has important implications for Cubans.

A notable feature of this law is that it excludes, subtly but categorically, Cuban residents on the island from participating as investors in the economy, but not necessarily those who reside off it. In this regard the law is ambiguous and subject to being applied at the Government's discretion. The problem is that such a prohibition affects all Cuban citizens in many ways, whether or not they are entrepreneurs or investors. Castro's expropriations were not limited to the private properties that existed before 1960, but included the rights of citizens to invest in their country, to create the wealth needed for development, to make decisions that directly affect them, and to enjoy the benefits of active participation in the nation’s economic affairs. But the new Foreign Investment Law excludes Cubans, who are not only to be barred from being investors in their own country, but also from being executives of these investments for an obvious reason: foreign investors will prefer to take their own executives to Cuba, because they trust them more than those assigned by the Cuban government, as called for by the Law.

The Law's Article 30.1 states that the employees under these foreign investments will be hired "by an employing entity proposed by the Ministry of Foreign Trade and Foreign Investment and authorized by the Ministry of Labor and Social Security." With these restrictions Cubans are destined to not only be employees of state or foreign companies, but also to occupy lower-ranking jobs in their country's economy. "The tourism apartheid that existed in Cuba for several years resurges, and legally, through this new official disposition."

Under these conditions the effects of the normalization of relations between Cuba and the US will depend on the degree to which the Cuban economy liberalizes, as determined by Washington and Havana. The unconditional lifting of the US embargo without Cuba liberalizing its economy will only aggravate the economic apartheid to which Cubans are subjected. As Cuban citizens are economically weaker, this means that they will have fewer opportunities to acquire political power. In other words, the Foreign Investment Law tends to confirm President Obama's dilemma, as described in a a previous article in this publication: if he liberalizes too much (lifting the embargo) without Castro introducing internal reform, he will not achieve the (secondary) objective of improving political conditions for Cubans. Even worse, he'll end up lining the pockets of the Castro family and its entourage, bolstering their political power and possibly dismantling the self-employed sector, which they won't need if new investments generate sufficient employment. The US Congress may want to consider these points before lifting the embargo without getting anything in return.