Foreign direct investment also needs Cuba

Do not interpret the title as it is, this has nothing to do with the size of the Cuban market, with how decisive our economy is in the world or regional sphere, or with an enormous availability of natural resources or cheap labor force. Nothing of the kind. It is the other way around, because achieving a flow of stable foreign investment, and above all relevant, for the purpose of growth and development, requires that a country (institutions, infrastructure, productive system, a business culture, etc.) make it easier to be able to make an investment in that country. That is why FDI needs Cuba.

The incentive behind these lines has been the recent exchange about this issue that has emerged between a group of Cuban economists, especially the work that Miguel Alejandro Figueras sent me a week ago. But I would lie if I were to say that it is the only incentive, the other one that spurred me on to write these lines is the recent approval by the country’s two topmost authorities (the Central Committee of the Communist Party of Cuba and the National Assembly) of three documents that must be the foundations, but also the roadmap and the architecture of the country we want to have.

If we take a look at Cuba’s economic performance in recent years (and I’m referring now to a period of some 10 years) we will be able to notice this by just looking at two facts. The first, well known, that our growth rate is still below the rate that almost all the experts, and also the Cuban government, identify as the necessary rate. We are at around 2.5 percent, when we should have had at least 5 percent. The second is that age-old deficit in our foreign balance of commodities.

What is seen in plain view are the reasons for these two facts. However, those reasons have been dealt with once and again. Among them, the low investment rate (investment as part of the GDP) has held a leading position as the decisive cause of this low growth rate. Meanwhile, our weak and not very complementary productive system is one of the principal reasons that we do not export more, simply because what is not produced with certain qualities, time and price is impossible to export, except if there are “special” conditions in trade.

The journey toward other causes behind these is much longer and has been studied, discussed and documented for years by many Cuban economists.

Well then, foreign direct investment has been identified, in my opinion very correctly, as one of the factors that could contribute positively to resolving that big problem we have suffered for years and that has to do with the production of national wealth, essential for all the rest we want. What is not produced is not distributed, there is no way in which it can be exchanged, and it is impossible to be appropriated by someone or by several persons. It is true: foreign direct investment can contribute to our GDP growth and at the same time increase our exports.

Our relationship with FDI has been very special. We were an investment area practically without restrictions for the economy and U.S. capitals during the entire first half of the 20th century. Afterwards, since the start of the 1960s until practically the early 1980s, FDI was identified as a sworn enemy of our aspirations for development, an instrument of neocolonialism and imperialism, something that was absolutely not true. Our access to it became practically impossible, first because it was not wanted politically or ideologically and also because the U.S. blockade made foreign investors pay a high price.

In the 1980s Decree Law 50 was approved, but nothing proactive was done to really attract FDI until the collapse of the socialist camp practically became a reality and our sources of foreign savings were committed first and later almost completely disappeared. Saving socialism also meant opening our country to Foreign Direct Investment – what a paradox! Therefore it was assumed as a “necessary evil” that later with the first law for FDI approved in 1995 became a “dangerous complement,” to later, around 2010-2011, become a complete one and between 2014, when our second law was approved, and 2016 it became a “need for our development.” That has been, as I see it, the road of the ideo-political perception of the issue in Cuba.

I am making this colorful synthesis of all this long process just to illustrate that the prejudices that today prevent a more proactive attitude toward FDI had a long process of gestation and are strongly rooted in the Cuban political culture.

The same occurred and occurs with private property. That political culture led us to structure a system of assimilation aimed at isolating the influence of this type of business and avoiding the “contamination” of the rest of the economy, with this causing worse damages than what it aimed to avoid. At the same time, the highest-ranking leadership understood its decisive role for the country’s survival and for the strategic character of the future development. FDI for Cuba was then, first of all, a political priority associated to survival.

This is how the idea came about of making a socialism that could be made as the only way of maintaining alive the aspiration of being able to make, one day, the socialism we want to have. In these matters wanting is not always being able, even when, as my grandfather used to say, he who wants does more than he who can.

It is true, just as Miguel Alejandro Figueras reminded us in his notes, that during those years, from 1988 until 2000, the total amount of negotiated foreign investment reached two billion, in some 400 enterprises, it is also true that out of this amount ETECSA, Habanos S.A. and Moa Bay contributed more than half of those two billion, and it is also true that starting 2002 a process of “revision/rectification” began and which reduced those enterprises from 400 to 230 in an event of non-creative destruction by the industrial and productive system created during 15 years and sending signs that were absolutely not positive for new, old and possible investors; something absolutely not convenient whose cost of opportunity will never be able to be calculated.

A conversation with Delaney:

In October 1995 I was talking with Ian Delaney, president of Sherritt, in his Toronto office. I took advantage of the occasion and asked him how they had been able to increase by 40% Moa’s annual production.

Delaney described three simple actions:

“We met with each one of the Cuban workers and we asked them what had to be done to avoid constant production stoppages; they asked for gloves, simple tools and some gaskets and valves that they could change themselves. Total cost: half a million dollars.”

“We met with the Cuban engineers, we explained that in the world they were the ones who knew the most about producing nickel with sulfuric acid; we jointly prepared with them each one of their functions, rights, responsibility and authority in the area they directed. That was the end of just anyone being able to order the stopping of the factory.”

“We met with a part of the Cuban engineers and Mike, that fat financier of the company – he knows nothing about nickel technology – asked if a maritime shipment of sulfuric acid could be acquired if the fifth lixiviation train were not built. The same Cuban engineers gave the solution of sealing a tank in the port with special resins that would make it possible to unload a ship carrying that acid. That’s what happened and that was the end of the stoppages because of a temporary shortage of acid in the process.”

Miguel Alejandro Figueras

I believe it is also good to dwell on some of the “cultural” behaviors that have accompanied the FDI until now in our country:

1- The preference for large projects vs. undervaluation of the small projects.

2- The practically null role of the territories in the processes of forming projects and decision making with respect to them and the absence of a “territorial portfolio of FDI projects” that promotes the territory’s opportunities do not appear in the large national portfolio.

3- The perception that we, that is, some persons in the sectorial ministries, are the only ones who are able to identify a possible opportunity.

4- The shortage/lack/absence of public information about FDI except for the data published in the annual business portfolio, which does not contribute to creating the necessary trust.

5- The generalized perception that the foreign investor needs us and that we are definitively “doing them a favor.”

If we do the math, we will then have that from 1988 to 2000, in some 13 years, the amount of negotiated FDI did not surpass 1.555 billion dollars, that is, less than 120 million per year. At present the authorities from the sector recognize that in 2016 more than 500 million was not attained, 20 percent of the “wanted” 2.5 billion. Therefore it is evident that the current negotiation effort has had, at least in 2015 and 2016, better results, but at the same time it is very far from the necessary amount of FDI.

Miguel Alejandro Figueras calls our attention about another issue of utmost importance, the “Cuban economy’s absorption capacity” with respect to foreign direct investment; I quote him as follows: In 2016 the construction sector produced 6.7 billion pesos. Then the accumulation rate was 12%. If it were possible to attract the 2.5 billion dollars of foreign investment demanded to grow 5-7% a year, it would be necessary to increase twofold the amount of constructions. It is necessary to plan so that productions increase by another six billion pesos.

Just in tourism it is necessary to more than increase by twofold the rate of construction to achieve the 104,000 rooms which it aspires for 2030.

Undoubtedly, construction is one of the strongest bottlenecks of the country’s aspirations for growth and also for the assimilation of the FDI flows. But the same occurs with communications – our ETECSA which is not glorious! – and transportation.

Meanwhile Pedro Monreal (https://elestadocomotal.com/2017/05/27/inversion-extranjera-a-cuanto-debemos-aspirar/), in that recent work gave rise to the exchange that led to this article, points out that Cuba is – in comparative terms – in a notably atypical point of departure in its immediate geographical environment. In all of Central America and the Caribbean, only Haiti registers less percentages than Cuba in terms of annual FDI flows in total investment. On the other hand, only Curacao and Monserrat register a lower percentage in the weight of FDI in the GDP.

The well-known weak capacity of our industry to produce part of the inputs those projects require also becomes a factor that reduces the “multiplication of foreign investment and its positive effects” in Cuba. In other words, the flexibility of production is very low in our country and this generates import volumes that jeopardize the balance of Cuban foreign accounts: something also extensively documented in numerous works by Cuban academicians.

Then it is necessary to understand what the FDI tendencies in this current world are. Regarding this, what the UNCTAD states in its 2016 report about investment policies is interesting:

The facilitation of investments is crucial for the post-2015 development agenda. The facilitation is different from the investments promotion. The promotion consists in selling a place as an investments destination and, therefore, it is usually specific of a country and usually has a competitive character. The facilitation consists in adopting measures so it is easier for investors to establish or expand their investments and carry out their day-to-day operations.

The facilitation of investments can include improvements in the transparency and information at the disposal of the investors; measures to increase efficiency and efficacy of the management procedures for the investors; improvement in the coherence and foreseeability of the regulation environment for investors through consultation procedures; and the mitigation of conflicts related to investments through mediators.

To date, the national and international investment policies pay relatively little attention to the facilitation of investments. Of the 173 new investment promotion and facilitation policies introduced in the entire world between 2010 and 2015, only a minority of them included investment facilitation measures.

I believe this is the idea for the present and the future.

Making a quick review, I believe I can identify in the last year and a half three occasions in which President Raúl Castro has demanded that the archaic mentality about foreign investment must be changed. “It is necessary to once and for all overcome the obsolete mentality full of prejudices against foreign investment,” he said last December. Unfortunately it seems there are not sufficient receptive ears to this. If we are convinced that it’s impossible to do without FDI, if we are aware that it is a need for our development, then, if today’s Cuba is still a “destination” of some interest, if dozens of investors come to Cuba despite the blockade, if many of them are able to establish themselves or do not give up their intention despite ourselves, then facilitating those processes is decisive. Undoubtedly it is necessary to change many things and it is necessary to create a new FDI-related culture. That is the sense of this article’s title.

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