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article imageCuba: obstacle course for foreign investors

By Carlos Batista (AFP)     Apr 1, 2014 in Business

Foreign investors still face an obstacle course in Cuba despite the passage of a new, more liberal law aimed at attracting capital from outside the communist-ruled island.

Cuba's National Assembly unanimously approved the law on Saturday, offering tax and other incentives to foreign investors, who are seen as crucial to reviving the country's stagnant economy.

But even as he pitched the new law, Foreign Trade and Investment Minister Rodrigo Malmierca acknowledged to lawmakers many impediments to foreign investment remain.

He ticked them off in a speech to the assembly: "The economic, commercial and financial blockade imposed by the American government, the foreign debt situation, the past errors in terms of investment and the restrictions imposed by the lack of foreign currency."

The US embargo, in place since 1962 and denounced daily by Havana and annually by an immense majority of the UN General Assembly, is solidly embedded in US law.

Rodrigo Malmierca Diaz  Minister of Foreign Trade and Foreign Investment of Cuba  speaks at a UN con...
Rodrigo Malmierca Diaz, Minister of Foreign Trade and Foreign Investment of Cuba, speaks at a UN conference, in New York, June 24, 2009
Stan Honda, AFP/File

It prohibits Americans and Cuban residents of the United States from investing in Cuba and threatens sanctions against companies who do business in Cuba, whether they are US subsidiaries or foreign companies that also operate in the United States.

Nevertheless, US President Barack Obama "holds out the possibility of creating licenses to allow particularly Cuban-Americans to invest in and promote the nascent Cuban private sector," says Arturo Lopez-Levy, a Cuban academic at the University of Denver.

There are some exemptions to the embargo, obtained notably by the powerful American agro-business lobby, and some Cuban exiles have expressed interest in investing in sugar production in Cuba.

"The American government should seriously think about it, because Cuba is a market that some Americans greatly wish to reconquer," said Esteban Morales, of the University of Havana.

- Inertia and bottlenecks -

The high cost of servicing Cuba's foreign debt is another problem limiting the island's capacity to borrow and adding to its need for direct foreign investment.

Workers make cigars at the H.Upmann cigar factory in Havana  on February 27  2014
Workers make cigars at the H.Upmann cigar factory in Havana, on February 27, 2014
Adalberto Roque, AFP/File

The last official figure put Cuba's foreign debt at $13.6 billion in 2010.

Since then, Cuba has managed to cancel part of its foreign debt with Russia, Japan and Mexico.

While Malmierca did not explain what he meant by "the errors of the past," Lopez-Levy said that the new law faces many of the same pitfalls as the 1995 foreign investment law it replaced.

"The 1995 law was never applied in full because of inertia on the part of the administration and because of several bottlenecks," he told AFP.

For example, the old law like the new one authorized the creation of enterprises with 100 percent foreign capital.

But in practice every foreign company operating in Cuba does so through joint ventures in which the state has a majority stake.

To these problems, the Cuban government adds another: the hiring of personnel.

Under the new law, as in the old, foreign investors have no direct control over their personnel, who must be hired through a state-run agency.

"This measure should have been eliminated," said Morales, because it both goes against workers' rights and undermines productivity and healthy management.

Lopez-Levy, for his part, regrets that the new law fails to specifically allow remittances from Cubans living abroad to be used and treated as foreign investment.

The remittances amount to about $2.6 billion a year, making them Cuba's second most important source of foreign revenues, on a par with tourism.

The nascent private sector, which today employs some 450,000 people -- compared to four million in the public sector -- benefits hugely from remittances.

Addressing them in the new law would have created a legal framework for business associations between the Cuban diaspora and those on the island, he said.

"All these businesses should receive breaks and incentives, notably in terms of taxes, because of their positive social impact," said Lopez-Levy.

Addressing them in the new law would have created a legal framework for business associations between the Cuban diaspora and those on the island, he said.

"It is a simple economic reform which incomprehensibly has been put off," said Lopez-Levy.

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