Cuba's New Communism

Since June 1995, Castro's world tour has scooped up more than US$3B in foreign investment .. and more reforms are in the pipeline to keep the cash flowing

After remaining in the safe haven of his homeland for more than a decade, the recent worldwide tour by Cuban President Fidel Castro has not only attracted new political interest in the communist state, but also several billion dollars worth of investments from around the world.

His success also highlights the ineffectiveness of the 36 year old US trade embargo against the island.

Contrary to its purpose, the embargo has provided a windfall for other western nations which use the situation as an opportunity to get a foothold into to the only market in the region where the United States' economic influence is still minimal.

In just a few years, Cuba's economy has experienced significant transformations as compared with the late eighties, says Carlos Lage, Vice President of the Cuban Council of State.

Lage describes Cuba's economy as a corporative sector which represents agriculture, a highly respected private farmers sector, a sector of self- employed workers, active in a broad range of products and services and a growing sector of companies involving foreign capital in various forms of association.

"These all co- exist with a state owned sector," he adds. "We don't deceive anyone," he says. "We are not offering our foreign partners a transition to capitalism. Cuba is, and will continue to be, a socialist country.

"What we offer for the future is stability and continuity, and a more reasonable use of all resources available, including our labour force."

American businesses impatience of "just looking on" at the windfall profits being taken by other western businessmen, are also becoming more vocal about their country's current trade policy with Cuba.

They argue that it simply takes business opportunities away from them, while the rest of the world continues to trade normally with Cuba.

Hard Currency Needs

Despite the need for hard currency to finance the nation's economic restructuring, international interest in Cuba as a destination for investment funds is increasing rapidly. So much so that the Castro administration is only allowing investment into targeted segments of the economy.

Competing with locals is not allowed, especially if it involves an industry that already exists within Cuba, says Garvin Creg, a Trade Official of Trinidad and Tobago's Industrial Development Corporation (TIDCO).

Investment is only allowed in sectors where there is no local substitute, says Creg, who formed part of a trade mission to Cuba in late 1995.

The Government's whole focus is on acquiring foreign currency to finance its economic adjustment program. Therefore, the Cuban Foreign Investment Ministry will only accept projects which are skewed in that direction.

Projects with high foreign exchange revenue earning capacity are favoured and this has prompted the existence of two parallel economies.

"One for foreigners. They can buy anything in Cuba with US dollars. They even receive their change in US currency. A second economy exists for Cubans who use local currency for purchases and everyday trade."

Controlled Labour

In its deliberations on reforming the previous trade and investment policies, the National Assembly denied a request by foreign businesses to be allowed to hire and pay their workers directly, rather than through a state agency.

Foreign businesses pay workers' salaries in US dollars to the state, which pays the workers a peso salary worth far less than on the free market. It works out to be the same dollar to peso rate.

For example, if the worker's salary is US$500 per month, this is paid to the Cuban Government, which gives the worker a salary of 500 pesos. "This is much less when you consider the exchange rate is about 25 pesos to the US dollar.

Some employers pay supplemental under- the- table dollar bonuses to workers and hope to eliminate the middle man altogether.

From the perspective of a regional grouping such as Caricom, Cuba represents a vast market that is easily accessible and much larger than Caricom, Creg explains.

The Cuban Government is also taking steps to foster closer ties with their regional neighbours- even if the Cubans plan to use the new level of corporation to soften the hard line taken by the US over the past three decades.

Cuba has also seen the importance of belonging to some political or trade grouping. Improving its ties with Caricom, and particularly the Association of Caribbean States (ACS), will provide some lobbying power against the will of the US.

Softening US Policy?

In anticipation of a softening of US policy over the next few years, many US firms have been taking steps to establish links or set out the procedure for doing business indirectly with the communist state.

In dealing with Castro himself, the reaction in the US has been the same as around the world.

There were literally hundreds of American business executives lining up to meet him when he addressed the UN in September last year, says John Kavulich, president of the US-Cuba Trade and Economic Council in New York.

Drawn toward a market of workers and consumers more than twice the size of Caricom, within less than an hour's flight from Miami, scores of American businesses have started to establish links for future joint ventures in Cuba, the last totalitarian state in the Western hemisphere.

Cuba's potential is attracting everyone from the top of the Fortune 500 all the way down to individual entrepreneurs, says Kavulich, whose group works closely with American businesses and Castro's government.

Trade Potential

The frustrating thing for American executives, however, is that their missions to Havana are mostly exploratory.

With few exceptions, U.S. companies remain shut out of Cuba under an embargo the Kennedy administration began at the height of the Cold War to try to starve Castro out of office.

After 36 years, Castro is still around and so is the embargo.

I know North Americans and Cubans (in the United States) who rack their brains thinking of ways to invest, Castro said during a televised speech last September in Havana, but they can't.

To add to the embargo, last September, the US Congress voted to tighten the noose on Cuba's staggering economy. The House approved, by a 294-130 margin, a bill that would strengthen the embargo and penalize other countries that do business in Cuba.

These sanctions, however, go almost unnoticed by the rest of the world. With trade flourishing between Cuba and countries such as Canada, Mexico, Spain and Caricom, Cuba's foreign trade is expected to top US$4 billion in 1996.

"Those dealings are pumping oxygen into Castro's crumbling regime, says US Congressman, Jesse A Helms, who introduced the bill to the legislature. Similar legislation is pending in the Senate, with strong Republican support.

US President, Bill Clinton, has already stated his intention to veto the measure if it reaches his desk.

Eyeing potential profits, analysts believe annual two- way US-Cuba trade could rise from its current $300 million to more than $15 billion by the end of the decade, if the embargo is lifted.

Wrong Direction?

Many American executives also think the House vote pushes U.S. policy in the wrong direction.

Despite this, the international trade and new investments from the rest of the world, secured by Castro's regime, will provide the communist administration with the leg- room to restructure the country's ailing economy to face freer competition in the future.

We think it should go the other way, said Thomas Polski, spokesman for the Minneapolis-based Carlson Companies, who views Cuba as a good spot for its Radisson hotels and TGI Friday's restaurants.

Coca-Cola, a big seller in Cuba before Castro nationalized its facilities there, would be selling its soft drinks in Havana in hours if the embargo were lifted, said Pedro Pablo Diaz, the company's vice president for communications for Latin America.

When the government of the United States decides that it's appropriate, said Diaz, we are going immediately.

Unequal Policy

Officially, the White House regards Castro's regime as too repressive for partnership.

They cannot speak freely, they cannot organize to protest, they cannot choose their own leaders, Clinton said at a business meeting last June. Economic change remains slow, stubborn and painfully inadequate.

However, similar concerns haven't kept the United States from maintaining full diplomatic and commercial relations with other countries at odds with U.S. human rights standards and political values.

Easily recognizable examples are China and Vietnam. Both are single-party, communist states, yet China enjoys preferred trading nation status with the US.

What keeps Cubans from hosting guests at the Radisson may have more to do with American voters than with Castro's ideology, said former diplomat Ernest Preeg, author of Cuba and the New Caribbean Economic Order.

This is more about domestic politics, than foreign policy.

Cuban-Americans comprise a powerful political force in Florida, whose whopping 25 electoral votes get a presidential candidate nearly a tenth of the way to the White House. Neither Clinton nor his Republican opponents want to alienate Cuban-Americans, the most vocal of whom back the embargo.

"There's no question where most people in my district stand on this," says Republican Porter Goss, "and that is Fidel Castro is the problem."

Goss who represents much of south Florida says that from the responses he has been getting from his constituents, there isn't much sentiment to deal with him (Castro). Social reform also stands between Cuba and U.S. trade and investment, he adds.

It may still be unfair to compare the two countries says Tom Cox, executive director of the US-Cuba Business Council, a Washington trade group representing 40 large American companies interested in doing business with Cuba - eventually.

"Cuba is light years behind Vietnam in terms of economic reforms. So far, the necessary conditions for commercial activity aren't there, says Cox.

Investors are also disappointed that Havana refused to loosen its labour laws when the ruling party announced a new foreign investment law last September. Under the law, the Communist Party - not the foreign investor - decides who will work where and how much they will earn.

Investors also fear for the security of their property under a regime that in 1962 seized $2 billion worth of factories, offices and other property. Nearly 6,000 American companies and individuals have outstanding property claims in US Courts against Havana.

You still have to resolve this problem of confidence in the political regime, said Cox, in order to jump start the Cuban economy.

However, some analysts believe that Cuba's new law opening the country to foreign investment is part the strategy by the communist leadership to secure the survival of the one- party state without risking pressures for political change.

But while old guard Communist Party officials may view the law purely as a tool to secure communist rule, the younger, more pragmatic generation may see it as a step toward further reform, says Peter Hakim, President of Inter- American Dialogue, a Washington- based lobbying group.

He predicts that as the market opens, the trend will have to continue and it will be impossible to turn back. Actually, the US blockade may be doing more harm than good to the opening of the Cuban market, economy and society.

Investment Law

The New Investment Law, which attracted much publicity when it was adopted last September, opens Cuba to foreign investment in all areas of the economy, except defence, education, and health care.

It permits foreigners to fully own businesses, their offices, housing and other related buildings.

Previously, foreign investors were only allowed to enter joint ventures with the Cuban Government. They were officially barred from more than 50 percent ownership.

But Antonio Jorge, Professor at Florida International University, down- plays the strategy as a ploy for the current Cuban regime to keep their hold on power.

I think Castro isn't trying to convince the world that he is in transition from a socialist economy to a market economy. However, the new labour law will serve to re- assure investors that Cuba will not turn away from its recent policies of liberalization.

Currently, ordinary Cubans are only allowed to own heavily taxed, strictly regulated cottage industries and cannot acquire business properties or conduct international trade says Jorge.

The Cuban Government estimates that foreign investors have sunk US$4 billion into joint ventures, with the Spanish leading in tourism, Canadians in mining and Mexico in telecommunications.