Foreign Investment Opportunities In Cuba: Evaluating the Risks

Abstract

Between 1989 and 1993, Cuba's economic output declined by as much as 50 percent, and virtually all of the economic gains professed under the revolution have disappeared over this short period. Despite this economic performance and the wave of economic reforms witnessed in many of the former socialist countries and even in China, the Cuban government has failed to acknowledge the need for a fundamental restructuring of Cuba's economic system. Indeed, the economic policy effort has focused on managing the economic crisis rather than on critically examining the island's basic development strategy. The government has not considered fundamental reform of its economy, much less the political system, as a necessary element in its revitalization. The basic pillar of Cuba's economy during the "miracle growth" years of the early 1980s, favorable trade relations with the Soviet bloc, is gone, and the nation has yet to develop an alternative growth model that is viable in today's global economy. In response to the current economic crisis, Cuba has turned to foreign direct investment (FDI) as the cornerstone of its strategy for lifting the economy out of depression. Although FDI has been permitted in Cuba since 1982, it is only recently that firms have 18demonstrated an interest in entering into joint ventures in Cuba. While the overwhelming interest has been in tourism and, to a lesser degree, in the extractive industries, the Cuban government hopes to attract investors in nearly all sectors of its economy. This paper examines the risks of FDI in Cuba, highlights the often changing nature of economic policy in Cuba, and questions Cuba's long-term commitment to the policies that it hopes will encourage FDI. The authors note that Cuba has made little progress in demonstrating a long-term commitment to the development of an economic environment that reasonably ensures long-run profitability of investments. Despite the government's efforts to attract foreign investment, considerable uncertainty remains over important issues such as the potential for nationalization, the potential for revisions in the regulations and fiscal incentives that currently make FDI profitable, the long-term stability of the economy, and the long-term stability of the government itself. FDI in different sectors has different degrees of risk, with the lowest risk for those sectors that earn hard currencies and in which profitability is large enough to allow for the recovery of initial capital investment within a relatively short period (two to three years).