Cuba: potential or potential threat.

Author:Becker, Hilary M.
Position:Cuban economic aspects

ABSTRACT

Cuba has undergone major changes over the past decade, both socially and economically, and to some extent politically following the demise of the Soviet Union and the decline of soviet monies and support. Within this framework of change exists opportunities to restructure the interwoven social and economic structures. Cuba is indeed making many of these changes and providing economic opportunities for those willing to do commercial business with Cuba. For the United States, the U.S. Embargo with Cuba prevents direct investment and limits this opportunity; however, this same embargo provides benefits to the interests of some commercial enterprises in the United States. Recently, the United States has engaged in limited normalization of relations with Cuba leading many to believe the embargo will be rifted in the near future. This paper will investigate some of the issues of doing business in Cuba, and provide viewpoints on the potential advantages and threats of the normalization of relations between the United States and Cuba and its implications in international markets. Specifically, this paper will discuss the U.S. Embargo, potential changes to fiscal and monetary policy being considered in Cuba, accounting and performance measurement systems, and changes in the business environment in the tourism, fisheries and agriculture sectors.

  1. INTRODUCTION

    The Cuban economy has undergone major changes in the past decade following the collapse of the Soviet Union in 1988. The period immediately following the demise of the Soviet Union, known as the "Special Period" saw major upheavals in the Cuban way of life after a decline of between five and six billion dollars annually of Soviet support. Scarcity of food and necessities, increases in inflationary pressures and a rise in the black market saw a backlash against the Cuban government. The Cuban government in turn responded to the challenges by turning toward a more capitalistic approach in their business dealings, moving towards a more open-market economy, and instituting economic and fiscal changes as well as making changes in the primary focus of economic development for the island. Primarily, the changes came in the form of decriminalization of the U.S. dollar and a switch from sugarcane production to tourism, agriculture and health care sectors.

    The Cuban government has contemplated and instigated many changes to fiscal and monetary policies including an overhaul of the taxation system, consideration of a movement to the Euro versus the U.S. dollar and introduction of Law 77, the "Foreign Investment Act". This paper will examine many of these issues in the context of the changes that have been put in place and its potential impact on foreign enterprises doing business with Cuba. The paper will also deal with the impact of the U.S. embargo and the potential advantages and disadvantages of normalization of relations with Cuba for U.S. business enterprises following the potential lifting of the embargo.

    1.1 The Embargo

    The U.S. embargo with Cuba, instituted in 1963, and further tightened by the Cuba Democracy Act of 1992 created a situation where U.S. businesses were prevented from carrying on economic trade with Cuba or permitted to invest foreign capital in Cuba. This also included a ban on trade in medicine and food shipments to Cuba, which has created a potential health risk to Cuban citizens, as there has been limited access to pharmaceuticals within Cuba. Further, cargo ships visiting Cuban ports would not be provided access to collect or deliver cargo to U.S. ports for a period of 180 following the delivery of cargo to Cuba (American Association for World Heath Report, 1997). Recently, normalization of relations between Cuba and the U.S. exists in the areas of foods and pharmaceuticals, however Cuba is limited in the amounts that it can obtain in that the U.S. government will not allow credits to be used for payment of goods by Cuba, and the Cuban government is in short supply of hard currency. Many individuals believe that the U.S. embargo will be lifted quickly, such as House Majority Leader, Texas Republican Dick Armey who indicated congressional support for the U.S. embargo is fading (Caribbean Export News, 2002), while other individuals believe that as long as Fidel Castro is alive, the U.S. will not permit the embargo to be lifted.

  2. POTENTIAL

    There exist within Cuba now a tremendous opportunity for growth and expansion in certain underdeveloped and developing markets such as the tourism, technology and agriculture sectors. Currently, enterprises wishing to do business in Cuba must adhere to Law 77, "Foreign Investment Act" which outlines the manner in which foreign investment can exist with Cuban entities.

    2.1 Law 77

    On September 4, 1995, law 77 was instituted. Law 77 was preceded by Decree-Law 50, in 1982, which set the stage for foreign investment, and saw the first foreign investment occur in tourism in 1988. Following this, economic associations were formed in many areas including citrus markets, mining, oil exploration and manufacturing in 1991, and by 1995, 34 economic sectors, including agriculture, mining, manufacturing, construction, tourism, transportation and the communications sectors each saw the development of foreign investment associations. The purpose of law 77 is outlined below:

    "This Act has the purpose of promoting and encouraging foreign investment in the territory of the Republic of Cuba in order to carry out profitable activities that contribute to the country's economic capacity and sustainable development, on the basis of respect for the country's sovereignty and independence and the protection and rational use of natural resources, and of establishing, for that purpose, the basic legal regulations under which this should be realized.", (Draft of a Cuban Law on Foreign Investment, Law 77, article 1).

    Law 77 provides for foreign investment in one of three manners; a) Joint venture; b) International economic-association contract; or, c) Company with foreign capital, however, the majority of foreign investment be currently set up in the form of joint ventures or economic associations. In 2000, the major forms of economic associations were in the areas of basic industry (92), tourism (70), construction (33) and to lesser extents in other areas, with the major principles being Spain (97), Canada (75), Italy (55), expanding from 50 in 1991, to a total of 392 in 2000 (Perez 2002).

    2.2 Tourism

    Doing business in Cuba is a difficult process, but most would agree that the opportunities for substantially profitable business endeavors do exist. Current countries doing business in Cuba have the advantage, with the elimination of competition from the U.S. enterprises of gaining first mover advantage in the Cuban markets for businesses from Europe, Canada, Latin America and the Asia. Most foreign enterprises are attempting to become as deeply entrenched in Cuba and the minds of Cuban consumers as they can before, what many believe is the eventual normalization of relations with the U.S and the flood of U.S. enterprises into Cuba.

    Following the collapse of the Soviet Union, the Cuban government provided an official push towards allowing international investment in many sectors of the economy including tourism. Previously, Cuba was focused in the areas of Tobacco and Sugar production to sustain the economic development of the country, however, faced with decreasing tobacco sales as the health conscious world evolves, declining sales among the world's most wealthy in light of recent stock market turmoil and the subsequent loss of wealth, and declining worldwide sugar prices have created a situation where the Cuban government was forced to make adjustments in their long-term economic strategic focus. Looking to many of their island neighbours in the Caribbean, tourism was a natural area of interest for the Cuban government to develop. Cuba certainly has an attractive climate, with average temperatures of 24 degrees Celsius in January to 32 in summer, and some of the best white sand beaches in the Caribbean, which can easily rival those of Cancun or Antigua.

    Historically, Cuba's stages of tourism development can be broken into four stages. Initially, in 1915-1930 Cuba's tourism grew out of its proximity to the United States, the sanitary conditions which were present as one of the wealthiest Latin countries and the prohibition act instituted in the 1920's in the United States. The 1950-1958 phase of development in tourism in Cuba came about in relation to the Mafia. During this phase, there were many senate hearings into the gambling problems and Mafia connections to Las Vegas in the Southwestern United States. The Mafia, fearing reprisals and a potential shutdown of Las Vegas turned to Cuba as a back-up plan and spearheaded development within the island nation (Figueras, 2003). This was obviously shutdown following the Cuban Revolution in 1959. Domestic tourism was developed during the third phase from 1960-1985, and the fourth phase, which we are currently in has seen the introduction of foreign capital resulting from the introduction of Levy 77 in Cuba.

    The 1997 Cuban Economic Resolution indicated a need for hard currency in sectors to finance the economy beyond sugar and tobacco sectors. This has led to the Cuban government investing approximately 25% of total investments in tourism sector, which in 2000, contributed as much of 43% of the balance of payments, while 10 years prior, the sugar industry contributed between 70 and 75% of the balance of payments, and tourism only 6%. The Cuban government has also identified a need to have highly skilled and specially trained workers in the area of tourism. In 1994, several independent education centers were consolidated under FORMATUR to make 22 teaching centers across Cuba, which annually graduate 16,000 new workers in the tourism sector. (Guitierrez and Gancedo, 2002).

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