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Cuba's Business Environment: A Risky Proposition

by Jerry Haar
The Dante B. Fascell North–South Center

In a televised address to the Cuban people at the University of Havana on May 14, former President Jimmy Carter called for an end to the four-decade-old U.S. embargo against Cuba. He also urged the Cuban government to embark upon the path of democratic change. Less than one week later in Miami, President George W. Bush echoed loudly and strongly the parts of former President Carter's message dealing with implementing democratic institutions. As to lifting the embargo, President Bush firmly stated the U.S. government's long-standing position that doing business with Cuba would be off limits until democratic change takes place.

While heated debate over the morality and effectiveness of the U.S. embargo continues, scant attention has been paid to the practical, business dimension of the issue—namely, that even if the embargo on doing business with Cuba were lifted tomorrow, the country would remain a highly unattractive place in which to do business. Lifting restrictions on doing business with Cuba would not result in Fidel Castro’s swapping his copy of Karl Marx’s Das Kapital for Adam Smith’s Wealth of Nations or Francis Fukuyama’s The End of History and the Last Man. An ossified socialist regime with all of its totalitarian trappings—not the free market—will continue to determine which businesses are allowed, by whom, when, and under what conditions.  

Understandably, firms such as Archer Daniels Midland, John Deere, and Radisson Hotels eagerly await and lobby for the opening of the Cuban market. However, these companies and others like them in the few select industries where Cuba does offer attractive opportunities, such as agriculture, tourism, and mining, would do well to note the significant impediments that all firms must consider in their risk assessment criteria, whether they be trading, investing, licensing, or financing:

Small market size and low income. Eleven million people live in Cuba, fewer than the combined populations of Guadalajara and Bogotá and fewer than Rio de Janeiro alone. The cost of doing business in such a small market, where the business logistics infrastructure is woefully underdeveloped, is far greater than the cost of expanding a company’s market share in the three above-mentioned cities. Moreover, Cuban consumers are poor. In a country where unemployment and underemployment taken together exceed 50 percent, the average GDP per capita is a mere $1,500 per year--less than every other Western Hemisphere nation except Haiti. How many Cubans are able to purchase Kellogg's pop tarts, Levi's jeans, and GE microwave ovens to make it worthwhile for these U.S. multinationals to make a commitment to that market? The median monthly wage cannot even cover a Burger King Whopper, fries, and soft drink for two.

Absence of investor protection. Cuba’s much-touted Foreign Investment Law No. 77 is not comprehensive enough. It does not resolve problems such as the restricted liquidity of investments, high risk for foreign exchange losses, and reversibility of investment agreements. The experiences of foreign investors in Cuba are replete with horror stories. In 1995, the year the "liberalizing" law was passed, the Cuban government unilaterally canceled Spanish utility company Endesa’s investments in hotels. Mexico’s Grupo Domos found itself arbitrarily slapped with enormous back-tax penalities, and Canada’s FirstKey Project Technologies’ detailed proposal to build a $350-million power plant was stolen by the Cuban government and shopped around elsewhere. In addition to the uncertainty and hassles in the approval process of foreign investment projects, investors must confront poor management and accounting practices by the Cuban partner (no wholly owned subsidiaries are allowed); restrictions on selling to the local market; poor infrastructure, as in utilities, telecommunications; and a supply chain plagued with shortages and undependable delivery times.

Economic stagnation and financial risk. In 2001, Cuba devalued its currency by 18 percent and fell behind in debt payments of $500 million to private banks and firms in France, Spain, Japan, Canada, Chile, and Venezuela. This does not include the failure to repay government trade credits to France for the last four years and the principal on foreign debt of $11 billion plus $24 billion owed to the former Soviet Union. With export volumes and prices down in nickel, sugar, and tobacco, along with a fall in tourism and remittances from abroad and the scarcity of commercial credit, Cuba is likely to remain an economic basket case. Independent "farmers’ markets" and other recent openings for individual entrepreneurial activities are contained experiments aimed at releasing a little pressure within the totalitarian state and garnering spin from media worldwide that believes or wants to believe that Cuba is on the brink of market-oriented change. At the macro level, these new capitalistic ventures have made very little impact on the Cuban economy.

Corporate social responsibility? As multinational corporations have placed greater emphasis on social responsibility in recent decades, doing business in countries that do not respect human rights or labor rights is not considered good business practice. In this regard, Cuba wins the trifecta: First, workers in foreign joint ventures are paid from $400 to $500 per month, except that the Cuban government contracts with these workers and pays them from 400 to 500 pesos or $20 per month instead (netting a 95 percent commission for the Castro government). Second, exploitation of child labor is officially tolerated. While 17 is the minimum working age, it is commonplace to find children as young as 8 years old who are working, and children over the age of 11 must spend one month or longer during the summer working on a farm. Third, liberalizing exports to Cuba will expand the role, control, and revenue for the government to act as middleman in trade transactions. This windfall income for customs brokerages, distributors, and wholesale and retail stores—all government-operated—will provide increased money for the Castro government, not for the Cuban people. It is likely that a portion of this new income will be allocated to Cuba's intelligence and security services as well as neighborhood vigilante organizations, further postponing democracy and economic freedom in Cuba.

Better opportunities elsewhere in the region. There are a score of countries in the Caribbean Basin that embrace free markets, political democracy, and institutional reforms—nations whose policies of modernization, trade and economic integration, and investment promotion offer U.S. businesses far greater opportunities than those that might come from Cuba. For example, the Dominican Republic and El Salvador (a U.S. dollar-based country with a GDP per capita nearly double that of Cuba) offer high-growth, pro-business environments where export manufacturing, tourism, telecommunications, and consumer demand are fueling economic development and employment growth. Trinidad and Tobago, the economic powerhouse of the Caribbean, aggressively courts foreign investors and continues to expand and upgrade its infrastructure of ports, information technology, and energy, in response to regional demands for gas, chemicals, fertilizer, and steel.

Despite U.S. restrictions on trading and investing in Cuba, American companies will sell $150 million worth of farm goods to Cuba this year, as exports of food and medicine are permitted under U.S. law. Additionally, remittances by Cuban-Americans to relatives on the island exceed $500 million. As an International Trade Commission Report issued in 2001 found, the trade embargo caused neither huge, lost opportunities for U.S. firms (except for rice growers) nor great suffering for the Cuban people. Due to the embargo, the United States has lost exports of between $650 and $990 million annually; in turn, had the embargo not been in effect, Cuba would have gained an estimated $84 to $167 million per year. In contrast, U.S. firms export more than four times that amount to the Dominican Republic every year.

The prospect of doing business in Cuba is more attractive than the reality. Even if Castro’s government were to fall tomorrow, Cuba would have to create the administrative, judicial, financial, and regulatory institutions and operations essential for a market economy. In the meantime, U.S. companies in search of market expansion and greater profitability would be wise to look elsewhere in the Western Hemisphere, to countries where capitalism together with democratic institutions have been emerging for the last four decades.

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June 24, 2002

 

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