Mixed Signals / Foreign Investors on Edge
By Karen DeYoung Washington Post Service. International Herald Tribune. Paris, Tuesday, July 25, 2000
HAVANA - The Havana Palace, a 73-unit condominium building with pool and garage, is nearing completion in the upscale Miramar section of the Cuban capital. Designed to be sold to foreigners with business interests in Cuba, or those merely looking for a Caribbean pied-a-terre, it is one of 17
projects being built under a joint venture construction program authorized by the Cuban government in 1997.
But two months ago, foreigners were suddenly prohibited from buying the condos. A terse announcement by the Ministry of Foreign Investment and Economic Cooperation said all but a handful of the approximately 2,300 units in the foreign-financed initiative would be purchased by the government,
which presumably will rent them to approved foreigners.
It is not clear where cash-strapped Cuba will get the estimated $175 million needed to buy out foreign investment in the project. It is even less clear what spooked the government into canceling the sales program. Rumors in the business community range from panic over an inability to provide
sewer and water hookups, to fears that anti-Castro exiles would try to buy the condos through third parties, to complaints by Communist hard-liners that the private ownership initiative had simply moved too fast.
Whatever the reason, the condominium episode is cited by many business representatives and economists here as an illustration of the two steps forward, one step back liberalization policies Cuba has implemented since beginning its long climb from economic rock bottom in the early 1990s.
Some openings seem here to stay. President Fidel Castro said last month he believed Cuba would ''never again'' find it necessary to ban private possession of dollars, and he touted the wisdom of individual ownership in certain agricultural sectors. But the sudden and unexplained closure of
others has put many existing and potential investors on edge.
''There is a jerkiness'' in the way Cuba conducts business that makes investors nervous, said a representative of a major foreign investor who requested anonymity. ''The regulatory framework is not there. When momentum is interrupted, it feels like you're going backward.''
A Cuban economist who works inside the system put it more broadly. ''For a foreigner to want to go to a country and invest a large sum of money, the government has to be coherent. They can't say on the one hand they want something, and, on the other, have a leader who gives public speeches
denouncing the international financial system.''
Mr. Castro continues to denounce the International Monetary Fund and the World Bank for ''the insanity of privatization,'' even though the vast bulk of Cuba's $11 billion foreign debt has been overdue for years and the government is largely restricted to short-term international financing for
imports at what Cuba's Central Bank calls ''onerous'' interest rates.
Much of what Cuba imports is food. While the government seeks an end to the U.S. trade embargo, the main benefit of pending U.S. legislation eliminating a ban on food sales would be the difference between the cost of carrying Chinese and Vietnamese rice halfway around the world versus the price
of shipping Louisiana and Arkansas rice across the Gulf of Mexico.
But it is investment that is crucial to Cuba's continued recovery from the rapid economic fall following the abrupt end in 1989 of $4 billion a year in subsidies from the Soviet Union.
''In economic terms, Cuba sustained terrible damage,'' during the 35 percent contraction in the economy that occurred virtually overnight, Mr. Castro said in a recent interview. ''Supplies of fuel, food, raw material and parts for machinery and factories were abruptly and almost completely cut
off.''
While many outsiders did not believe any economy could survive such a precipitous downturn, severe belt-tightening and new foreign investment have put Cuba's gross domestic product into the plus column, where it has remained since 1994. The Cuban Central Bank said the economy grew 6.2 percent
last year, and 4.5 percent growth is projected for 2000.
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BUT THE PRICE has been high for individual Cubans. Government-subsidized rations, ranging from 12 eggs and slightly more than 2.5 kilograms (6 pounds) of rice a month to 1 bread roll a day, are considered about half of what is necessary. The monthly ration basket costs less than 15 pesos a
person, or about 70 U.S. cents.
The average monthly salary last year was 221 pesos. Most people do not pay rent, utilities are subsidized and education and health care are free. But there is a chronic shortage of medicine.
''You have to do a lot to make up for what was lost between 1989 and 1993,'' said the Cuban economist. ''It would take 8 to 9 percent growth annually to reach the point where individuals actually feel a difference.''
''They've gone through 10 years saying that people can live on one piece of bread a day,'' he added. ''It's a problem you can't see from the outside, but anybody who spends two weeks in Cuba knows what it is.''
Many Cubans are sustained by the economic liberalizations that allow them to receive, earn and spend extra money outside the government system. Although estimates vary, between 30 percent and 60 percent of Cubans have access to modest amounts of dollars, through joint venture employers or money
sent from abroad. Consumer goods are available in government-run dollar stores, and farmers can sell food on the open market once they have met their state quota.
As the economy begins to recover, however, some of the space that was opened for private entrepreneurs has begun to narrow. Although some Cubans are allowed to run restaurants in their homes, few licenses have been granted for such enterprises. Restaurateurs said there were none in the last two
years.
Some argue that while Cuba's basic economic structure can continue to produce growth over the medium term, it has little long-term promise.
Tourism and sugar production, which together produce 70 percent of all foreign exchange, have expanded substantially in the last five years, but most of the cash goes right back out to pay for imports.
The impact of structural changes has been mixed. What was once a centralized, Soviet-style system has been decentralized into a number of individual, state-owned companies. While still subject to quotas, these companies have varying degrees of autonomy, can sign contracts with each other and
handle their own marketing. Some, particularly in the tourism sector, have signed management contracts with foreign companies.
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FOREIGN INVESTMENT can be profitable for those with the nerves for it. Most enterprises are in Cuba on a 50-50 basis in which Cuba contributes land and facilities and foreigners pay for capital costs and labor. Taxes average 30 percent and all profits can be repatriated.
The U.S.-Cuba Trade and Economic Council, which is funded by U.S. businesses, said Cuba's largest foreign investor is Spain's Altadis, which spent a reported $500 million in December for half of Cuba's Habanos SA, the government's tobacco and cigar export marketer.
Second is a subsidiary of Telecom Italia, which bought a 29 percent interest in the Cuban national telephone company for a reported $400 million. The third-largest is Canada's Sherritt International Corp., with investments in nickel, oil, gas, electricity generation and other sectors.
But even the hardiest investors retain doubts. Companies expect Cuban government assurances to protect them from adverse changes in law. ''Right now, they've got a period of grace, a window of opportunity,'' to institutionalize a system governing all aspects of foreign investment, said a
representative of one foreign investor. ''It's needed in every sector.'' |