Cuba’s new foreign investment law

Cuba’s National Assembly is due to hold an ‘extraordinary session’ in March when a new law on foreign investment will be approved. Investors around the world, including perhaps some in the US given recent debate there, will be interested in seeing what the law says and whether it provides them with a good framework for investing and operating in Cuba in the future.

What sort of things will investors hope to see in the new law? I suspect many of them will hope it contains similar provisions to those contained in the regulations for the Mariel Special Economic Development Zone – an attractive tax regime, good infrastructure, majority foreign ownership allowed, a lower ‘tax’ on wage costs, a one-stop shop and fast decision-making on project proposals. All these things are important for guiding investment decisions.

But there’s more too. The World Bank’s Doing Business index gives a useful checklist as does the Bank’s work on investing across borders. The Doing Business index rates countries on a number of things including the time it takes to start a business, how quickly building permits are issued, how easy it is to get electricity and credit and how easy it is to pay taxes. They also consider how well investors are protected by the country’s laws and how contracts are enforced by the country’s courts. Investing across Borders looks more closely at FDI (foreign direct investment) providing a region-by-region and country-by-country analysis. I was intrigued to learn it takes 7 months to start a business in Haiti, 63 days to start one in Costa Rica, 29 days in Chile but only 4 days in Rwanda. Another index by the Heritage Foundation measures countries on similar themes and investors might look too at what the ratings agencies are saying (Fitch, Standard & Poor’s, Moody’s).

These indexes and ratings are important because Cuba is not alone in trying to attract FDI. Right across the Latin American and Caribbean region countries are keen to get more foreign investment to drive growth in their economies; to some extent they are in competition with one another. Some of Cuba’s neighbours have been very successful – Panama, for example, received $4bn in 2013 and the Dominican Republic received $3.6bn in 2012. Other countries with similar political systems to Cuba have also successful attracted FDI to drive growth in their economies. For example, Vietnam and China received $14bn and $117bn respectively in 2013. Of course both have much larger domestic markets than Cuba giving foreign entrepreneurs an additional reason to invest (Vietnam – 89m people, China – 1.4bn).

Naturally, prospective investors will not only look at the indexes and ratings but also talk to Cuban government officials, managers of state-owned enterprises and those running foreign businesses already established in Cuba to get a better feel for how it works on the ground. They’ll be keen to learn how quickly the unification of Cuba’s two currencies will progress, not least because it will have an impact on labour costs, have clarity about how they can incentivise productivity and, if involved in manufacturing products for export or the domestic market, get some assurances about the quality and certainty of their supply chain. This paper by Richard Feinberg of the Brookings Foundation looks in much more depth at these issues and even describes some useful case studies of seven Joint Ventures operating here.

Inside Cuba and in the rest of the world there’s a debate about the value of FDI and what its effect could be on an economy and society. Some fear it will subject the country to the vicissitudes of globalisation. However, there is fairly common agreement that FDI can have a real value in creating jobs, providing access to advanced technology, helping countries diversify and expand their export markets, helping with the transfer of management skills, providing access to international credit and allowing for import substitution. It also helps a country invest in capital formation, something Cuba sorely needs.  In countries like Cuba where there are limited domestic resources for investment, investment from overseas can be crucial in helping the country develop sustainably.

At the CELAC Summit held recently in Havana, regional leaders, themselves representing a wide range of political opinion, acknowledged the importance of FDI in their final declaration emphasising that it should ‘contribute effectively to development and translate into greater well-being for society’. That is something, I am sure, we can all agree to.

This is a huge topic and I certainly haven’t covered everything. It would be fascinating to hear your views so please use the comments section below. I look forward to a rich debate.