Cuba approves new foreign investment law to support development

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Fight Racism! Fight Imperialism! 240 August/September 2014

May Day in Havana, Cuba 2014

Cuba’s new direct Foreign Investment Law was implemented on 30 June 2014. Unanimously approved in March by the National Assembly of People’s Power, the law is in accordance with the Economic and Social Policy Guidelines for the Party and the Revolution. These guidelines were established by the 6th Congress of the Communist Party of Cuba in 2010 and discussed and modified across 163,000 consultations with almost nine million Cubans, before being ratified by the National Assembly of People’s Power in 2011. This extraordinary process of participative democracy governs the principles by which the Foreign Investment Law will operate. As the introduction of the guidelines affirms, ‘only socialism is capable of overcoming the difficulties and preserving the conquests of the Revolution, and that in the updating of the economic model, planning will be supreme, not the market’.

As we have discussed previously (see FRFI 221), the new law is part of a series of economic updates begun in 2008 designed to urgently increase domestic production, productivity and efficiency. This is necessary to increase national income, eliminate a balance of payments deficit, substitute imports with domestic production and develop the productive forces to work towards the long-term aims of ‘food and energy self-sufficiency, an efficient use of human potential, a higher level of competitiveness in traditional production areas, and the development of new forms of the production of goods and services of higher added value.’

As a trade-dependent island, Cuba is directly affected by the global capitalist crisis. Imported food prices rose 19% in 2013, highlighting the urgent need to increase domestic agricultural production. Added to this pressure is the illegal US blockade, estimated to have cost Cuba $1.126 trillion over 54 years and amounting to ‘an act of genocide’ under the 1948 Geneva Convention. As Noel Carillo, representative for International Relations of the Central Committee of the Communist Party of Cuba highlighted in 2012: ‘Cuba faces two options – economic collapse, or updating the economy, building the only possible socialism in Cuba’. It is in this context that Cuba has taken a series of measures to improve efficiency and productivity, taking steps towards monetary unification (see FRFI 236); the distribution of idle land to farmers, in usufruct (see FRFI 206); the creation of agricultural and non-agricultural cooperatives; self-employed jobs and Special Economic Development Zones to attract foreign investment capital (see FRFI 238).

Whilst the international media is keen to paint these measures as reintroducing capitalism in Cuba, Milagro Perez Caballero, National Secretariat of Cuba’s Trade union confederation (CTC) emphasised in a recent conference that ‘there’s no idea of an exchange of property. I have to make that very clear. The means of production remain in the hands of workers ... enterprises of the socialist state will remain preponderant.’ This vision was underlined by President of the Council of the state Raul Castro, who in a speech to the National Assembly on 5 July 2014 emphasised that ‘among this development plan’s principles is the continued social ownership of the fundamental means of production, and the forging of a development model with efficiency in all spheres, directed toward assuring social well-being, equity and justice for Cubans’.

New foreign investment law to promote investment and development
The primary objective of the new law is to attract $2-2.5bn of foreign investment capital annually in order to promote economic growth and generate the wealth necessary to consolidate the gains of the Revolution and fund increases in the Cuban standard of living. Incomes have already increased 1.3% above the amount projected for the first half of the year. However, the Cuban government identifies that an economic growth of 5-7% is necessary to support the level of development envisaged through to 2030. In 2013 economic growth reached 2.7%, below the 3.6% target. In June 2014, with growth for the first half of this year at 0.6%, the government downgraded its economic growth target from 2.2% to 1.4%.

Despite some growth in transportation, communications, agriculture and tourism, the low overall growth rate is attributed to difficulties in obtaining the planned amount of foreign revenue, shortfalls in several core industries, such as the production of sugar (12% below expected growth) and coffee (2% below), poor industrial performance, the delayed arrival of materials, adverse weather and the tightening of the US blockade. French bank BNP Paribas was recently fined $8.97bn by US authorities for breaking sanctions on Cuba, Iran and Sudan, including $1.75bn of transactions with Cuba between 2004 and 2010.

Speaking at the National Assembly, Raul Castro stated, ‘We are not satisfied with the results achieved, but neither are we discouraged in the least. Faced with these difficult circumstances, our spirit of struggle, determination and optimism must prevail, to reverse the situation and regain the rate of growth needed to assure socialist development, based on sustainable and irreversible foundations’. He also emphasised the need to implement these updates carefully, saying, ‘In this process, neither should we leave the door open to precipitous decisions or improvisation. The gradual pace is not a whim, much less indicative of a desire to slow the changes that we must make. To the contrary, it reflects the need to assure order and avoid vacuums which could lead us directly to errors, discrediting the proposed objectives’.

Foreign investment is sought for projects in agriculture, biotechnology, electronics, forestry, pharmaceuticals, renewable energy, recycling of raw materials, tourism and other strategic key areas. Cuba’s food imports last year totalled $1.6bn, but it is estimated that 60% of this could be produced domestically within the next few years.

The main changes to the previous 1995 law include:

  • A streamlined 45-day ministerial approval service for some minor enterprises (with a maximum 60-day waiting period for a response to any other foreign investment proposals).
  • The halving of taxes on profits of most joint state-foreign enterprises from 30% to 15%.
  • An exemption from income tax and an eight year tax exemption on profits for new investors, extendible in special cases, but to be followed by a 50% tax on profits for most ventures.
  • The tax limit on profits from new raw material enterprises will be reduced from 45% to 22%, although companies that exploit natural resources such as fossil fuels or nickel could pay taxes on profits up to 50%.
  • Enterprises will be exempt from customs taxes for the importation of any necessary equipment during the initial investment process.
  • Enterprises will not have to pay a direct labour tax.

The law will allow 100% foreign-owned companies to operate in Cuba in special cases (as opposed to the standard joint venture agreement in which the Cuban state retains 51% ownership), albeit it with much higher rates of tax than joint state-foreign enterprises. Agricultural and non-agricultural cooperatives may also be granted access to foreign capital and may form joint enterprises under government supervision. The Cuban government retains the right to expropriate properties in cases of previously declared public or social interest, but would be obliged to pay compensation.

Each application will be vetted by the Ministry of Foreign Trade and Investment and the Ministry of Science, Technology and Environment ensuring environmental conservation and rational use of natural resources remain a priority for the Cuban people. Foreign investment will not be allowed into the armed forces, communications, education, health care or legal services, preserving Cuba’s sovereignty and protecting the outstanding achievements of the revolution in healthcare and education.

Foreign investment under these stipulations is already taking off at the port in the new Mariel Special Economic Development Zone, which since its inauguration in January has handled approximately 15,000 containers and is currently analysing 23 investment proposals, prioritising renewable energy projects. Renewable energy currently generates 4.3% of Cuba’s electricity and energy self-sufficiency is an important factor in reducing imports. The port will be linked to Havana city by Cuba’s first new railway in more than two decades, which opened on 26 July 2014.

The new labour code
The new foreign investment law is accompanied by the publication of the new labour code in June 2014. The code was drafted in 2011 and has been discussed across 69,056 assemblies with 2,802,459 workers. Unlike in ‘free-trade zones’ in other countries, Cuban workers will be protected. Foreign employers must hire workers and negotiate wages through a Cuban state employment agency, subject to authorisation from the Ministry of Labour and Social Security in accordance with political priorities. The CTC Trade Union Confederation is centrally involved, ensuring workers hired by foreign investment are organised and defended.

Non-state sector employment has now risen to 27% combining new employment from foreign investment, self-employment and cooperatives. This is an essential step in streamlining the state workforce which in 2010 was estimated to include more than one million people working in surplus posts. Moving these surplus workers into productive jobs in cooperatives, the private sector and self-employment is a prerequisite of increasing economic growth. With new employment created through foreign investment, the Government aims to reduce state jobs by a further 20% by 2016. 66% of agricultural workers are now organised into cooperatives, whilst 498 experimental non-agricultural cooperatives have been authorised since their establishment in December 2012 and number of self-employed workers has increased from 157,037 to 467,000 since 2010. The new labour code enshrines the rights of self-employed and cooperative workers, guaranteeing equal rights as state employees in relation to a 44 hour week, minimum wage and health and safety protection. This provides a new challenge in the unionisation and defence of workers which the CTC has begun to address in its 20th Congress held in February 2014.

Who will invest?
Venezuela is Cuba’s main trading partner and in July 2014, 400 Venezuelan business representatives, state and private, attended a forum held in Havana. Cuba has already received several significant proposals from Venezuela, China, Brazil and Spain. Also in July, Russia cancelled 90% of Cuba’s disputed $35.2bn Soviet-era ‘debt’, with President Putin visiting the following week to agree ten accords with Cuba, including an agreement on cooperation in improving the recovery ratio of oil in mature oilfields. Cuba will pay the outstanding 10% over a 10-year period, and Putin indicated the remaining $3.25bn will be reinvested in Cuban development projects.

Regional political support for Cuba was underscored in the June 2014 general assembly of the Organisation of American States (OAS) in Paraguay. 20 countries spoke out against Cuba’s 52-year exclusion from the organisation leaving only the US and Canada to defend the ban. Bolivia, Ecuador, Nicaragua and Venezuela have all stated they will boycott next year’s OAS summit in Paraguay if Cuba is excluded, Brazil and Argentina have also expressed their reluctance to attend. With Cuba’s prominent role in regional trade and solidarity initiatives including ALBA (the Bolivarian Alliance for Latin America) and CELAC (the Community of Latin American and Caribbean states), mutually beneficial trade and investment is set to develop from strength to strength. The Mariel port is Cuba’s nearest port to the US and will be deep enough to accommodate huge cargo-ships from the Panama canal. Since the US blockade prohibits ships that dock in Cuba from entering US territorial waters for six months, as international cooperation and investment with Cuba blossoms, the US is left increasingly isolated in Latin America.

President Castro summarised the Party’s strategic long-term approach to development in his closing speech at the December 2013 National Assembly: ‘We are leaving behind the short-term vision, conditioned by emergencies and the unforeseen; we are now in a position to project development through to 2030, based on solid information and confidence in the future.’

Andrew George and Sam McGill