In the last few days there have been interesting exchanges on the Internet about whether Cubans living abroad (CLA) can invest in Cuba. The government clarifies that Law No 118 on foreign investment does not limit them. It is also clear that the CLAs have invested without having to have recourse to this law.
Therefore, we must start by recognizing reality: for some time now non-resident Cubans have invested in Cuba. The most prominent place that has now been given in the official discourse to the notion that Cuban citizens with permanent residence abroad are not limited to invest is, without doubt, a public policy action that is welcome, but, in some sense, could be understood as an invitation that’s come a little late.
Although there are no precise data, enough fragmented evidence is available to state that part of the family remittances received in the country are devoted to creating and expanding legal private activities and cooperatives.
For CLAs who wish to invest in businesses in Cuba, there are different ways of associating with residents (family, friends, or simply partners) to transform remittances into investment. These non-resident Cubans are not recognized as investors, but that is what they are. Nor is the existence of a national private enterprise recognized, and this also exists.
Official data on self-employment (SE) seem to indicate that there are four categories that, as a whole, cover 49% of SE activities, and that are particularly conducive to making the conversion of remittances work as investment: food (paladares, cafeterias, street vendors), with nine percent; cargo and passenger transportation (eight percent); the rental of homes, rooms and spaces (six percent); and hired workers (26 percent), basically associated with food and transportation activities.
The national private sector can’t legally receive CLA investment today―which is stipulated by Law 118―because private entities are still not recognized as having legal status, despite the fact that the new Constitution includes them. It has been said that we should wait for these forms of non-state management to be recognized as legal entities in order to channel CLA investments in the national private sector.
But it’s a known fact that the national private sector hasn’t had its arms crossed and has received investment from CLA for some time now, without having to depend on the pace of state bureaucracy. CLA investment has been a positive process because it has created employment and income for thousands of people in Cuba. It’s very likely that a not small percentage of the more 580,000 SE and the more than 306,000 private farmers have been functioning as channels for CLA investment for years.
In other words, the investment “business” of Cubans living abroad in the Cuban private sector has been set up for a long time and works reasonably well, despite the fact that it does not have any legal backing.
Could Law 118 change this state of affairs?
In principle, today Law 118 certainly does not prevent CLA investment in the state and cooperative sector, although in practice this has not been happening, at least in a visible way.
More importantly, the process protected by Law 118 does not seem to make things easier for CLAs who are already investing in Cuba “on their own,” or what would probably be the average new CLA investor, perhaps interested in taking advantage of Law 118, but mostly with low and medium investment potential.
The foreseeable profile of the majority of CLA investors could be more in line with the size of private SMEs that have not yet been legalized in Cuba than with the million-dollar projects in the state sector’s business opportunities portfolio. It isn’t ruled out that there might be CLAs interested in exploring possibilities for investment in large-size projects, but it is reasonable to expect that these are a minority within the total of CLAs willing to invest in Cuba at this time.
Here it’s convenient to put your feet firmly on the ground: there seems to be no evidence that there is a kind of CLA “club of titanic businesses” pressuring the Cuban government to invest in the business portfolio that is officially offered to foreign investment.
On the contrary, the evidence that exists, based on the real experience of the remittances-investments “model,” points in a different direction: the CLAs that invest today in Cuba, and other CLAs that would be interested in investing, fit mainly into the profile of small- and medium-size investors.
The problem then lies in the fact that the probable “area” with the highest density of CLA investors―small and medium enterprises―would not find immediate space in the investment channels regulated by Law 118 because, as has been said, it is required that CLAs have to associate exclusively with a legal entity, that is, state entities or cooperatives.
Assuming that the legalization of the national enterprise is achieved in the medium term and that, therefore, it would allow CLA investors to do legal business under Law 118, the possible appeal of the law would depend on at least two factors.
In the first place, that there would be a correspondence between the profile of CLA investors and the officially prioritized projects for foreign investment.
As indicated above, this is an area of non-coincidence at the level of investment scales that would exclude, initially, most of the CLA investors. However, there is an exceptional possibility―subject to certain conditions―of exploring investments in projects not included in the business opportunities portfolio. That is something that leads us to the second factor that should be considered.
The possible attractiveness would essentially depend on what is known as the “transaction cost,” that is, the cost an investor must incur to make a transaction in the market. It includes research and information costs, negotiation and decision costs, and monitoring and execution costs.
The problem here is that the process of foreign investment in Cuba was designed for large investments. It would suffice to superficially review the investment portfolio to confirm that reality. “Transaction costs” tend to be relatively high, since an “integral analysis” of the proposed project, observance of internationally established profitability indicators, and pre-feasibility studies that must be part of the proposal and business dossier are required. The cost of all that can amount to thousands of dollars that must be spent before the investor has received the slightest indication that the proposal would be accepted or rejected.
All this could be justified for large investments, but for a small- and medium-size investment the “transaction costs” would be huge, have a very high risk, and therefore would be unthinkable to assume. What might be “normal” for a large enterprise is unacceptable for a small investment. It is known that the sizes modify the criteria of “rationality” in terms of the economy. We should not think twice about this issue.
Under these conditions, it is unlikely that a non-resident Cuban investor―with small and medium capital―will decide to invest “legally” under Law 118, but with a very high transaction cost for the size of their business.
While the CLA investor has the alternative of investing through the remittances-investment “model,” with a low transaction cost in a private business, this would be the CLA’s main investment channel for small- and medium-size activities. Particularly when the fact of having “legal ownership” status of your investment is not the main incentive to invest and to operate a profitable business.
What should be the official bet?
In Cuba there exists a paradox: the area that is legalized and regulated by Law 118 to be able to associate with CLAs has not received any investment known to them, having a “zero economic impact,” while the area that is not legalized as a legal entity has received CLA investment that does not appear as foreign investment, but that has had an impact on the functioning of the national private sector. This sector has been the main creator of net employment in the country and represents an important source of family income for the national economy.
Without the operation of the more than 1 million national private workers, Cuba’s current macroeconomic conditions would be considerably more fragile. Without the operation of a national private economic sector, the possibilities would be minimal of relocating the hundreds of thousands of workers that would be a “surplus” as a result of a process of reform of the state enterprise that would necessarily be conducted in a context of low investment rates.
It is, apparently, a concept that has not yet been incorporated into Cuba’s foreign investment strategy, which insists on continuing to operate with a design exaggeratedly inclined towards a sectoral rationality that places macroeconomic rationality in the background.
Obviously, sectoral policies are an important component of the development process and it is normal that this be reflected in the mechanisms to attract foreign investment towards prioritized sector projects, but the transformation of the sectoral structure does not take place within the framework of a macroeconomic vacuum.
What impact at the added value level, not simply the sector level, could foreign investment projects have on a macroeconomic context of minimal and unstable growth and low wages?
The answer is obvious: very little or none.
That’s why a good point to start thinking about the CLA investment could be to grant the macroeconomic criteria the priority they are due. Doing so could be the gateway to a more pragmatic CLA investment policy.
At a time of fragility like the one being experienced today by the Cuban economy, the economic priority must be at the macro level, while at the sectoral level what is urgent is the national production of food. It is essential to prevent a recession, stabilize growth, and take it progressively to levels above 5% per year. It is also a priority to get the country out of the food security crisis it is in. If that does not happen, development will not advance.
It will have to be done in the midst of a strengthening of the U.S. economic blockade against Cuba. There’s no other option.
This pragmatic investment policy should combine two tracks: one for the possible investments of CLAs interested in large-size investment and which would be carried out under Law 188, as well as for potential CLA small-size investors for whom it “works out” to operate under Law 188 and wish to avail themselves of this law. In this case the CLAs would be given the same treatment as the foreign investor.
The second track should be to maintain the remittances-investment “model” that has demonstrated that it works reasonably well, even under unfavorable conditions. Attracting investments in that track could be reinforced through the legalization of the private enterprise, as this would favor greater profitability in the private sector. Special attention should be paid to CLA investment in the agricultural sector. In this case the CLAs wouldn’t have to be given a foreign investor treatment. The investment would be legally made by a legal national private entity or by individuals residing in the country. If the remittances-investment “model” works, what need is there to put it at risk?
That is to say, it would not be a matter of legalizing private enterprises to force them to channel CLA investment in the form of foreign investment under Law 118, but to open that channel without closing the possibility that CLA investment originating in remittances can continue to exist.
Qualitatively speaking, a dollar invested by CLAs is “as good” for the national economy in a remittance-investment model, as a dollar invested by CLAs under Law 188.
The difference is, as we have seen, that Law 188 has not been conceived for the average CLA investor, and therefore would have extremely high “transaction costs.”
It is difficult to assume that a small CLA investor leave the “path” of the remittance-investment model to take the “path” offered by Law 188.
I am also skeptical about other “paths” that have sometimes been suggested like the establishment of bonds and/or investment funds that would allow the Cuban government to centralize the dispersed investment amounts of numerous CLAs. These schemes could work if there were stock markets, something that is not the case in Cuba.
A CLA that is a small and medium investor would not take the risk of these investment means mainly with the goal of receiving periodic dividends, but to increase the value of long-term assets―as part of the investment portfolio’s diversification strategies―and to be able to obtain capital gains through the purchase and sale of bonds and shares in stock markets. But those markets do not exist today in Cuba, nor are there any signs that they could be created.
Let me repeat, the country’s economic needs are now located at the macro level and food security, rather than at the sectoral level. Any investment must be favored―large, medium and small―but there must be differentiated mechanisms to attract them and to make them work.
The emphasis of the current debate should not be on whether a CLA should be considered a foreign investor. The accent should be placed on how to facilitate any type of investment CLAs wish to make to contribute to growth in the short term and improve food security through investment in national agriculture.
What matters now is that the end meets the purpose.
*This article originally appeared in the author’s blog elestadocomotal.com. It is being reproduced with his authorization.