Emilio Morales* (Cafe Fuerte)
HAVANA TIMES — In recent months, Venezuela’s political and economic crisis, coupled with the absence of investment capital in Cuba, have given rise to desperate attempts at returning to the days of financial success that characterized the boom of joint venture companies on the island.
Joint venture companies played an important role in economic recovery efforts during the 90s, when Cuba experienced the severe economic crisis known as the Special Period. Many of them were created to meet the needs of the tourism market (which was growing at the time) and the decriminalization of hard currencies, which gave rise to the dollar retail market in the country.
The chief aim was to develop the infrastructure of those industries that were the backbone of the tourism sector, substitute imports and reinvigorate the country’s economy. Joint venture companies were created in several sectors of the economy, primarily the industrial sector, tourism, the food and real estate sectors.
Decisions, for the most part, were left in the hands of the foreign partners (following consultation with their Cuban counterpart), for they were the ones investing both the financial capital and the technology. These companies played a central role in the training of human resources and the use of capitalist market strategies. This process was paralleled by the so-called “company streamlining” campaign led by the economic planning apparatus of the Ministry of the Armed Forces (MINFAR).
Among the managers of these companies were government officials trained in and taught marketing techniques. This was particularly true of those occupying the highest positions. It was a way of guaranteeing loyalty, preventing corruption and maintaining strict control over information.
The boom in this new type of commercial activity was so intense that, coupled with companies that operated in free trade zones and other types of partnerships, the country managed to accumulate an investment capital of about 3 billion dollars.
The Shadow of Uncertainty
As of 2002, however, Cuba’s investment capital began to decline. In 2004, the government took a 180-degree turn and returned to a centralized economy, prompting the rapid deceleration of investments, a process which gradually drove the liberalizing process began in the 90s to a halt.
The government’s decision to step on the brakes led to the closing of around 200 joint-venture companies and resulted in a drop in the total capital devoted to investments around the country. In place of such investments, Cuba opted to prioritize investments made by partner governments such as Venezuela, China and Brazil, relegating private investments to the background through a rapid reduction in the number of contracts signed with foreign companies.
If we compare the years 1999 and 2011, we can appreciate the abrupt decrease in the number of joint-venture companies and direct investments in Cuba. All of the country’s markets experienced a drop in the number of foreign companies operating on the island, with the exception of Venezuela, which was the only partner with which businesses and investments were broadened.
Venezuela went from having 13 joint-venture companies in Cuba in 1999 to 30 in 2001. By contrast, the number of Spanish companies dropped from 85 to 48, Canadian companies from 61 to 33 and Italian companies from 54 to 30 in the course of those three years.
Many of the entities that survived and remained in the country experienced a series of financial restrictions from 2008 to 2010. The measure affected some 300 Spanish firms that operated businesses on the island in some form or another and led to tensions between the Cuban government and Spanish diplomacy.
Obstacles and Shortages
The Cuban government’s lack of financial solvency led to financial stagnation, a situation which, in addition to undermining the supply of raw materials destined to different industrial sectors then in operation, resulted in inventory shortages in the hard currency retail chains and affected the supply of products in the tourism sector. Delays in payments also contributed to a decrease in foreign capital investments.
After Raul Castro took office, the Cuban government went on to reform the economy through the so-called “updating of Cuba’s economic model.” The priorities established as part of Raul Castro’s reform process include the introduction of market mechanisms, to be subordinated to the socialist planning system at all levels. One of the premises of the reform process is to open up the economy to foreign investment through the creation of joint-venture companies, in which the Cuban government is to own at least 51 % of the shares.
Since the reforms began to be implemented, the bulk of measures undertaken to reform Cuba’s economic model have been aimed at broadening the private sector and liberalizing agriculture. On the other hand, incentives for foreign investment have not been that vigorous. Quite the contrary, they have been suspended as a result of the government’s crusade again corruption among foreign investors and Cuban company managers who represent State enterprises that maintain relations with foreign companies based in the country.
As a result of this anti-corruption campaign, several foreign businesspeople and high-ranking Cuban officials (including one minister, several vice-ministers and company managers) have been arrested in Cuba. Those arrested were tried on charges of corruption, the taking of bribes and other crimes.
Some, like Chilean Max Marambio, have received sentences as severe as 20 years imprisonment. Others have been absolved after more than a year in prison, awaiting their trials. The most alarming case involves 73-year-old Canadian businessman Cy Tokmakjian, who has been in prison for two years without having been informed of criminal charges, and whose companies have been shut down in Cuba.
Without a doubt, this anti-corruption crusade has created a less-than-attractive environment for foreign investors, producing a sense of uncertainty and insecurity which, far from drawing investments, has served to stop the flow of capital towards the country.
Looking for New Investors
The Cuban government has just created a special, commercial development zone in Cuba’s Mariel port, to the west of Havana, through a 900 million dollar investment from the Brazilian government, with a view to getting a second wind and attempting to once again attract foreign capital.
Clearly, cognizant of the current situation of Cuba’s economy and the crisis in Venezuela (its main ally and one of the island’s main economic pillars), the government is moving towards encouraging foreign investment in different sectors of the economy. This strategic move is aimed at reaching a better financial performance than that achieved in the 90s.
Within this context of pressing financial needs, the development of joint-venture companies in Cuba is being fostered in the tourism, agriculture and real estate sectors.
However, it is not clear whether Cuba’s traditional commercial partners with operations on the island will step up their investments in these markets.
The uncertainty created by the lack of transparency in the cases of the detained foreign businesspeople and the foreign companies that have been shut down have resulted in a climate of mistrust which continues to haunt alternative investment sectors of the Cuban economy.
The need for a new foreign investments law that will be more flexible and attractive– announced by Raul Castro at the beginning of the year – is being patiently awaited by potential investors, and the delays in its implementation explains the scant movement of capital towards the island this past year.
Waiting for Cuba’s Monetary Unification
The announcement of a future monetary unification is another element of this atmosphere of mistrust and financial paralysis. It is obvious that foreign companies with investments in Cuba will be hit, in one way or another, by the adjustments in exchange rates, and waiting is far more advisable now in all matters money related.
Thus, government efforts to attract a new wave of investors to the Mariel commercial zone will suffer a considerable impact. The uncertainty surrounding the unification of the two currencies constitutes an element which, for the time being, is holding back foreign investment.
The government is desperately looking for new sources of investment and assures us that its legislative reforms will create conditions bound to attract more foreign capital to the country. The big question prompted by this new legislation is whether the investment map drawn by Cuba’s Ministry of Foreign Trade and Investment will include, for the first time in more than fifty years, the community of Cubans residing abroad, a community which, according to the official rhetoric, is an indissoluble part of the nation.
The new legislation, however, fails to appear when Cuba needs it the most and this is a dangerous situation for, as the crisis intensifies, the country continues to lose the appeal and trust it needs to win over the new investors of the 21st century.
* Cuban economist. Former head of marketing of Cuba’s CIMEX corporation and author of the books “Cuba: A Silent Transition to Capitalism?” and “Marketing without Advertising, Brand Preference and Consumer Choice in Cuba.” He is the president of the Havana Consulting Group based in Miami.