Failed Sanctions: Why the U.S. Embargo against Cuba Could Never Work

3 Evolution and Results of Foreign Investment in Cuba

3 Evolution and Results of Foreign Investment in Cuba Cuba’s response to the deteriorating economic situation subsequent to the collapse of its former benefactor, the Soviet Union, was the implementation in September 1990 of an economic austerity program called the “special period in time of peace.” The program consisted of a series of measures intended to conserve energy and raw materials, stimulate food production, expand markets for exports and imports, and accelerate the development of international tourism. But the main novelty was the opening of the island to foreign direct investment (FDI) in the search for the markets, technology, and financing that disappeared with the collapse of the socialist bloc.1 While it cannot be argued that foreign investment plays a fundamental role in the Cuban economy, it is evident that foreign capital has helped Cuba to find new markets for its main exports, boost international tourism, raise production of oil and electricity, and increase domestic supplies to the tourism industry and the internal market in hard currency. Following a cautious start during the worst years of the economic recession when a handful of hotel and oil exploration joint ventures were formed, foreign investment in Cuba gathered pace after 1993 as the economy began to show signs of a modest but constant recovery. Since then, and despite the passage of the Helms-Burton law in 1996, a sizable Evolution and Results of Foreign Investment in Cuba / 61 number of foreign firms have entered the Cuban market with investments in nearly all sectors of the island’s economy. Yet, after more than a decade of uninterrupted growth, the number of joint ventures with overseas companies has fallen significantly since 2002, raising questions on just how wide the Castro government’s welcome to foreign investment really is. Although the level of interest for the Cuban market on the part of foreign investors has diminished, the recent decline of international economic associations (asociaciones económicas con capital extranjero, or AECEs)2 is not due to the impact of Helms-Burton but rather to Cuba’s increasing selectivity toward foreign investment and its unwillingness to create a more attractive business environment. In effect, the downward trend began several years after the enactment of the U.S. legislation and coincided with a process of re-centralization of the Cuban economy launched by Fidel Castro in 2003. Cuban authorities have never concealed their intention to keep foreign ownership and capital in the communist island at a minimum level. They always said that foreign investment is a complementary measure to help strengthen and improve the country’s state-run socialist system, not destroy it. While acceptance of new investments is based on strict consideration of what they can bring to Cuba in terms of capital, technology, and markets, the Cuban government has made it clear that it wants to keep overall state control of the economy. Furthermore, Cuba has done very little to address recurring complaints raised by overseas partners, which include excessive bureaucracy, project approval delays, payments problems, and a restrictive labor legislation. On the contrary, Fidel Castro’s moves to introduce foreign exchange controls for state-run enterprises and other centralizing economic measures have lowered confidence among existing and potential investors about their ability to deal with bureaucratic hurdles and collect payments and arrears from the Cuban government. Raúl Castro, who assumed provisional power when his older brother fell ill in July 2006 and formally replaced him as the country’s new president in February 2008, called for more foreign investment in Cuba in the summer of 2007,3 but his words have yet to translate into meaningful changes to the overall FDI regime. The drop in the number of active AECEs in Cuba is therefore hardly surprising. 62 / Failed Sanctions Any attempt to carry out a study of foreign investment in Cuba is hindered by the lack of thorough and reliable information on the activities of foreign firms and their contribution in terms of capital. Due to what Cubans call the “U.S. economic blockade” against the island, public disclosure of data on the presence of foreign capital in Cuba is basically limited to statistics on the evolution of international economic associations by year, by sector, and by country. This method of reporting the level of foreign investment in the country offers no idea of the value or strategic importance of the deals involved. Nonetheless, this chapter makes extensive use...