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Cuba's
Business Environment: A Risky Proposition |
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by
Jerry Haar
The Dante B. Fascell North–South Center
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In
a televised address to the Cuban people at the University of Havana on May 14,
former President Jimmy
 Carter
called for an end to the four-decade-old U.S. embargo against Cuba. He also
urged the Cuban government to embark upon the path of democratic change. Less
than one week later in Miami, President George W. Bush echoed loudly and
strongly the parts of former President Carter's message dealing with
implementing democratic institutions. As to lifting the embargo, President Bush
firmly stated the U.S. government's long-standing position that doing business
with Cuba would be off limits until democratic change takes place.
While
heated debate over the morality and effectiveness of the U.S. embargo continues,
scant attention has been paid to the practical, business dimension of the
issue—namely, that even if the embargo on doing business with Cuba were
lifted tomorrow, the country would remain a highly unattractive place in which
to do business. Lifting restrictions on doing business with Cuba would not
result in Fidel Castro’s swapping his copy of Karl Marx’s Das Kapital
for Adam Smith’s Wealth of Nations or Francis Fukuyama’s The End
of History and the Last Man. An ossified socialist regime with all of its
totalitarian trappings—not the free market—will continue to determine which
businesses are allowed, by whom, when, and under what conditions.
 Understandably,
firms such as Archer Daniels Midland, John Deere, and Radisson Hotels eagerly
await and lobby for the opening of the Cuban market. However, these companies
and others like them in the few select industries where Cuba does offer
attractive opportunities, such as agriculture, tourism, and mining, would do
well to note the significant impediments that all firms must consider in their
risk assessment criteria, whether they be trading, investing, licensing, or
financing:
Small
market size and low income.
Eleven million people live in Cuba, fewer than the combined populations of
Guadalajara and Bogotá and fewer than Rio de Janeiro alone. The cost of doing
business in such a small market, where the business logistics infrastructure is
woefully underdeveloped, is far greater than the cost of expanding a company’s
market share in the three above-mentioned cities. Moreover, Cuban consumers are
poor. In a country where unemployment and underemployment taken together exceed
50 percent, the average GDP per capita is a mere $1,500 per year--less than
every other Western Hemisphere nation except Haiti. How many Cubans are able to
purchase Kellogg's pop tarts, Levi's jeans, and GE microwave ovens to make it
worthwhile for these U.S. multinationals to make a commitment to that market?
The median monthly wage cannot even cover a Burger King Whopper, fries, and soft
drink for two.
Absence
of investor protection. Cuba’s
much-touted Foreign Investment Law No. 77 is not comprehensive
 enough.
It does not resolve problems such as the restricted liquidity of investments,
high risk for foreign exchange losses, and reversibility of investment
agreements. The experiences of foreign investors in Cuba are replete with horror
stories. In 1995, the year the "liberalizing" law was passed, the
Cuban government unilaterally canceled Spanish utility company Endesa’s
investments in hotels. Mexico’s Grupo Domos found itself arbitrarily slapped
with enormous back-tax penalities, and Canada’s FirstKey Project
Technologies’ detailed proposal to build a $350-million power plant was stolen
by the Cuban government and shopped around elsewhere. In addition to the
uncertainty and hassles in the approval process of foreign investment projects,
investors must confront poor management and accounting practices by the Cuban
partner (no wholly owned subsidiaries are allowed); restrictions on selling to
the local market; poor infrastructure, as in utilities, telecommunications; and
a supply chain plagued with shortages and undependable delivery times.
Economic
stagnation and financial risk.
In 2001, Cuba devalued its currency by 18 percent and fell behind in debt
payments of $500 million to private banks and firms in France, Spain, Japan,
Canada, Chile, and Venezuela. This does not include the failure to repay
government trade credits to France for the last four years and the principal on
foreign debt of $11 billion plus $24 billion owed to the former Soviet Union.
With export volumes and prices down in nickel, sugar, and tobacco, along with a
fall in tourism and remittances from abroad and the scarcity of commercial
credit, Cuba is likely to remain an economic basket case. Independent
"farmers’ markets" and other recent openings for individual
entrepreneurial activities are contained experiments aimed at releasing a little
pressure within the totalitarian state and garnering spin from media worldwide
that believes or wants to believe that Cuba is on the brink of market-oriented
change. At the macro level, these new capitalistic ventures have made very
little impact on the Cuban economy.
Corporate
social responsibility?
As multinational corporations have placed greater emphasis on social
responsibility in recent decades, doing business in countries that do not
respect human rights or labor rights is not considered good business practice.
In this regard, Cuba wins the trifecta: First, workers in foreign joint ventures
are paid from $400 to $500 per month, except that the Cuban government contracts
with these workers and pays them from 400 to 500 pesos or $20 per month instead
(netting a 95 percent commission for the Castro government). Second,
exploitation of child labor is officially tolerated. While 17 is the minimum
working age, it is commonplace to find children as young as 8 years old who are
working, and children over the age of 11 must spend one month or longer during
the summer working on a farm. Third, liberalizing exports to Cuba will expand
the role, control, and revenue for the government to act as middleman in trade
transactions. This windfall income for customs brokerages, distributors, and
wholesale and retail stores—all government-operated—will provide increased
money for the Castro government, not for the Cuban people. It is likely that a
portion of this new income will be allocated to Cuba's intelligence and security
services as well as neighborhood vigilante organizations, further postponing
democracy and economic freedom in Cuba.
Better
opportunities elsewhere in the region.
There are a score of countries in the Caribbean Basin that embrace free markets,
political democracy, and institutional reforms—nations whose policies of
modernization, trade and economic integration, and investment promotion offer
U.S. businesses far greater opportunities than those that might come from Cuba.
For example, the Dominican Republic and El Salvador (a U.S. dollar-based country
with a GDP per capita nearly double that of Cuba) offer high-growth,
pro-business environments where export manufacturing, tourism,
telecommunications, and consumer demand are fueling economic development and
employment growth. Trinidad and Tobago, the economic powerhouse of the
Caribbean, aggressively courts foreign investors and continues to expand and
upgrade its infrastructure of ports, information technology, and energy, in
response to regional demands for gas, chemicals, fertilizer, and steel.
 Despite
U.S. restrictions on trading and investing in Cuba, American companies will sell
$150 million worth of farm goods to Cuba this year, as exports of food and
medicine are permitted under U.S. law. Additionally, remittances by
Cuban-Americans to relatives on the island exceed $500 million. As an
International Trade Commission Report issued in 2001 found, the trade embargo
caused neither huge, lost opportunities for U.S. firms (except for rice growers)
nor great suffering for the Cuban people. Due to the embargo, the United States
has lost exports of between $650 and $990 million annually; in turn, had the
embargo not been in effect, Cuba would have gained an estimated $84 to $167
million per year. In contrast, U.S. firms export more than four times that
amount to the Dominican Republic every year.
The
prospect of doing business in Cuba is more attractive than the reality. Even if
Castro’s government were to fall tomorrow, Cuba would have to create the
administrative, judicial, financial, and regulatory institutions and operations
essential for a market economy. In the meantime, U.S. companies in search of
market expansion and greater profitability would be wise to look elsewhere in
the Western Hemisphere, to countries where capitalism together with democratic
institutions have been emerging for the last four decades.
Revista INTER-FORUM is affiliated with
(ICCAP) Any reproduction in part or whole is strictly forbidden without the authors written authorization
Top
June
24, 2002
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