CubaNews / November 2002
By Larry Luxner
The following are summaries of four papers prepared for the Cuba Transition Project of the University of Miami’s Institute for Cuban and Cuban-American Studies, with funding from the U.S. Agency for International Development. The full text of these papers, which were presented Sep. 5 in Washington, is available on the CTP's website at: http://www.miami.edu/iccas.
FOREIGN DIRECT INVESTMENT IN CUBA
Noted Cuba expert Robert David Cruz says that in order to promote foreign direct investment (FDI) to Cuba after Castro is gone, one must understand why the island’s efforts to attract FDI have failed so miserably until now.
“Cuba’s experience with FDI since 1993 has much to teach us about what not to do, and which approaches and policies are likely to fail,” says Cruz, an associate professor of economics and international business at Miami’s Barry University.
“Despite all the fanfare, Cuba hasn’t really succeeding in attracting FDI. This lack of success has less to do with U.S. policy toward Cuba, and more to do with Cuba’s FDI strategy and policies. Cuba’s institutional infrastructure is basically incompatible with FDI in a global market environment. That’s why it hasn’t been successful.”
Cruz says Cuba has attracted only a fraction of the $2 billion in FDI the Castro government claims has poured into the country over the last 10 years.
“There are a lot of reasons to wonder about their statistics,” he told CubaNews. According to UNCTAD and ECLAC —two UN-affiliated agencies — annual flows of FDI dropped from $15 million in 1998 to $9 million in 1999, rising slightly to $13 million in 2000.
Overall, between 1991 and 2000, Cuba had accumulated only $98 million in FDI, the second-lowest of all Caribbean and Central American countries. The $98 million figure was more than the foreign direct investment recorded over the same time period by the tiny island of Montserrat (with $77 million in FDI), but far less than Barbados ($300 million), Belize ($263 million), Dominica ($276 million) and even Haiti ($216 million).
If the rate of annual inflow holds up, then Cuba’s stock of foreign direct investment will reach between $115 million and $127 million by the end of 2002 —still a drop in the bucket given Cuba’s population of 11.2 million.
Cruz blames that on “the high risks associated with investing in a fairly unpredictable environment as well as the high investment costs associated with negotiating the regulatory bureaucracy.”
“Officials seem to go out of their way to create obstacles, according to EU investors’ complaints. Corruption and theft is a big problem, and so is excessive overhead. And bank and customs charges are prohibitively high. There’s always a big fanfare of investments going in, but we reallly don’t know what happens after that. It’s not environmentally friendly to foreign investors.”
Cruz says one of the fastest and most effective ways for post-Castro Cuba to attract large amounts of foreign investment will come from the restructuring of existing special export zones for offshore manufacturing facilities — an arrangement that’s generated billions of dollars for the economies of such countries as the Dominican Republic, El Salvador, Honduras and Costa Rica.
“Duty-free import of components for manufacturing, assembly and/or further processing and then ultimately exporting would give [Cuba] an immediate boost to employment, even while the nation designs and builds a new regulatory structure for commerce and a new tax system,” according to Cruz.
“The development of new export zones to encourage regional decentralization of economic development, and application of the special zone concept to tourism may be necessary to maintain FDI momentum.”
Even so, he says the scholar, “an unwavering commitment to macroeconomic stability is essential for promoting economic growth. Stability requires low rates of price inflation, low interest rates and avoidance of sudden and large variations in exchange rates, especially currency depreciations.”
And how would an end to the U.S. embargo against Cuba change things, even if Castro
remained in power? “It certainly would make a differerence be-cause you would have the ability to use Cuba as an export platform to the United States,” Cruz answers. “But if the regulatory changes don’t take place, Cuba would still be a difficult place to make a profit. All things being the same, the Dominican Republic and other countries would make better choices.”
ALTERNATIVE REGIMES AND U.S. POLICY
Edward González, professor of political science at UCLA and a consultant for Rand Corp., foresees three “regime-types” and corresponding sub-types emerging in an post-Castro scenario:
The first is a communist successor regime led by hardline, centrist and/or reformist lea-ders; the second is a military-led successor regime controlled by Raúl Castro and/or his raulista followers, and the third is a democra-tic-transition regime drawn from the ranks of current dissidents, human-rights activists and other opponents of the Castro government.
“In a communist successor regime,” González argues in his 53-page paper, “the hardline and centrist leaders represent varying degrees of continuity with the current post-totalitarian order, but neither appears capable of undertaking the reforms necessary to jump-start the economy and put it on the path of sustainable growth.
“While a communist regime led by reformers would be more inclined to adopt such reforms, they would first require the backing of Cuba’s Revolutionary Armed Forces. The FAR, however, would most likely seize power if the civilian leadership were unable to govern, much as Gen. Wojceich Jaruzelski did in Poland in 1981.
“However, a military-led successor regime would be faced with its own difficulties — international isolation, corruption and division within its own ranks, an inability to chart an effective economic course, and mounting unrest. A democratic-transition regime, on the other hand, would be hobbled by the democratic process itself in trying to tackle Cuba’s lingering problems, while history and especially Fidel Castro have left the island ill-prepared for democracy.”
González says U.S. national interests and democratic values “compel it to adopt a proactive policy to speed the island’s democratic transition,” and he recommends the following strategies to be adopted depending on which regime-type emerges in a post-Castro Cuba:
* toward either a communist successor regime led by hardliners and/or centrists, or a military-led regime, the objective should be “regime replacement through the use of coercive diplomacy.”
* toward a successor communist regime led by reformers, the goal should be “regime change through conditional engagement.”
* toward a democratic-transition regime, the objective should be “one of regime support through closer political, economic and people-to-people ties.”
The last scenario, while obviously the most desirable, could also prove to be the most difficult for the United States “because the task is infinitely more complex, involving an open-ended process of democratic development over a very long term.”
However, González says “if Cuban-Americans show leadership and mobilize broad support for a national project of reconstruction and prosperity, democratic forces inside Cuba could ensure that democracy prevails.”
INT’L ORGANIZATIONS AND POST-CASTRO CUBA
Ernesto F. Betancourt, former director of Radio Martí and a consultant on government reforms, discusses the assistance that would be required from various international organizations to support the Cuban transition after Fidel Castro’s demise.
In his arguments, Betancourt assumes that a transition government not only has replaced Castro, but that this transition government “is committed to restore democratic rule and a market economy, and that it has attained the minimum legitimacy required to rule Cuba in pursuit of such objectives.”
A large part of Betancourt’s 37-page report attempts to find lessons in the experience of Eastern European and former Soviet states following the collapse of communism there.
A World Bank report on the subject groups these countries into four categories: competitive democracies, concentrated political regimes, non-competitive political regimes
and war-torn regimes. Betancourt says the competitive democracies — a group of countries that includes Hungary, Slovenia, Estonia, Latvia, Lithuania, Poland and the Czech Republic — are most relevant to Cuba’s case.
“One characteristic of competitive democracies is that they generate substantial contestability and a high government turnover, and contrary to usual assumptions, this has not prevented them from achieving significant reform and high rates of economic growth,” he writes. “Therefore, they offer a model that is most consistent with the desired outcome of the Cuban transition.”
As a group, these competitive democracies showed a smaller cumulative output decline in the initial recession that followed the collapse of communism (22.6%) and a shorter duration of that recession (3.8 years) than did the Commonwealth of Independent States, in which GDP declined by 50.5% and the recession lasted for 6.5 years.
“Since Cuba has undertaken some economic reforms already — mostly to decentralize enterprise management and reduce budgetary subsidies — the transition recession may be even shorter and milder,” writes Betancourt. “However, if chaos and conflict prevail, it may take longer and be deeper. Then Cuba will fall under the ‘war-torn’ category of transitions.”
It is also imperative, says Betancourt, to “not only pursue policies that encourage the privatization of state enterprises, but also to encourage the emergence of new small enterprises” until they represent at least 40% of the country’s added value and labor force.
“There is ample evidence of a correlation between reliance on small and medium enterprises, instead of state enterprises — whether restructured or not — in attaining higher levels of growth.”
In addition, Cuba has an advantage not enjoyed by any of the former Soviet republics, with the exception of Armenia: the existence of a wealthy diaspora in the United States.
According to the 1997 U.S. Economic Census, there are over 125,000 Cuban-owned firms in the United States, 70% of them in South Florida. Some 30,000 of these firms have paid employees, and they generate over $24 billion in annual sales.
“If only a fraction of the owners of these firms can be encouraged to enter into partnerships with relatives or friends still left in Cuba with some experience as self-employed entrepreneurs, or make direct investments in totally new enterprises,” writes Betancourt, “Cuba could experience a much more significant recovery than if they are ignored or, even worse, discouraged from participating in the transition.”
Finally, Betancourt argues that “since Cuba isn’t a member of the IMF, the World Bank or the IDB, preparatory work should be started before the actual transition occurs to cut the time lag in securing access to urgent financial resources for Cuba’s reconstruction.”
THE CUBAN COMMUNIST PARTY
In 70 pages of well-documented research, William M. LeoGrande, professor of political science at American University in Washington, traces the development of the Partido Comunista de Cuba (PCC) from its birth in 1965 to the present.
He points out that the PCC was the world’s first communist party created after the triumph of the revolution it was intended to lead. Yet it was years before the Party was able to command the authority it does today.
Even by 1969, the PCC had only 55,000 members — just 0.6% of the population — making it the smallest ruling communist party in the world. But by 1975, membership had grown to 212,000, and by 1985, the PCC had over 520,000 members.
In 1997, on the eve of the Fifth Congress, membership had surpassed 780,000, thanks to changes that allowed believers in God to join, and an end to the requirement of sponsorship by existing members or prior membership in the Unión Juventud Comunista.
Today, says LeoGrande, the PCC has been redefined as the party of the “Cuban nation” rather than the party of the working class, with the ideas of José Martí carrying equal weight to those of Marx and Lenin.
Yet as market reforms weaken the PCC’s control over the economy, its political monopoly gradually unravels as well.
“Emergent entrepreneurs, both farmers and small businessmen, depend less and less on the state for their well-being,” he writes.
“As they accumulate wealth and grow increasingly indispensable to the health of the economy, their desire for less government interference is certain to take a more explicitly political direction.
“Managers of joint ventures and externally oriented industries already are having to adapt to market discipline. As subsidies for state enterprises dry up, other Cuban managers also will be forced to adapt and presumably will press for government policies that make their jobs easier.”
LeoGrande argues that democratic transition in Cuba will ultimately depend on the emergence of elite conflict in which reformers come to have more in common with regime opponents than with elite hardliners.
“Since no one can predict which faction of the PCC will be stronger when Fidel Castro departs, it certainly is not inevitable that Cuba will undergo a transition to multiparty democracy. China and Vietnam are as likely to be bellwethers for Cuba as are Eastern Europe or the former Soviet Union. If a transition to multiparty democracy does take place, however, the Eastern European experience suggests that the PCC, in a reformed guise, could retain considerable political appeal.”
LeoGrande says the PCC will enjoy organizational superiority; a socialist-value culture that favors continuation of social programs; strong nationalist sentiment that will impugn the patriotism of rivals too closely tied to the United States, and a formidable base of support among social groups that stand to lose if a transition to democracy in Cuba is accompanied by a transition to capitalism.
“External actors can improve the prospects for peaceful democratic transition by pursuing policies that reduce the political elite’s siege mentality, reward liberalizing reforms and abstain from actions that could be regarded as interference in Cuba’s internal affairs, lest such actions spark a nationalist backlash.
“In this regard,” he concludes, “Latin American and European actors are better positioned than the United States.”