Notes on the recent developments on the Cuban economy

 

 Very recently the Cuban government passed a new package of legal reforms opening up more of the economy to foreign investment.

 

Cuba has announced it will allow private businesses to operate in most sectors, in what is a major reform to its state-controlled economy.

Labour Minister Marta Elena Feito said the list of authorised activities had expanded from 127 to more than 2,000.

Only a minority of sectors would be reserved for the state, she said.

The communist country's economy has been hit hard by the pandemic and US sanctions introduced by the Trump administration.

Last year its economy shrank by 11% - its worst decline in almost three decades - and Cubans have been facing shortages of basic goods.

BBC 

 The news has not gone down well, with reactions being a mix of downplaying it entirely to blaming the US embargo yet again. I'm not sure why this time it provoked a reaction, even if you define socialism as state control of the economy or "the government doing stuff" as its commonly phrased in the US, Cuba has been trying to find a role for the global market for many years. I remember reading a collection of speeches by Fidel Castro from the 1980s and being surprised that he talked about private ownership still being a feature of Cuba, though mainly confined to about 10% of agricultural labourers who owned their own plots and small markets for commodities made by one person or by families. 

And if you go on the Cuban Chamber of Commerce website you'll find two PDFs written up explaining the 2014 investment reforms, one being a translation of the law and the other being a step by step guide for investors. 

INTRODUCTION
Foreign investment in Cuba, as part of the updating of the Cuban economic
model, is aimed at the diversification and expansion of export markets,
the access to advanced technologies, the replacement of imports, the obtainment
of foreign financing, the creation of new sources of employment,
the attraction of new managerial methods and their connection with the
development of productive chains, and the change of the country’s energy
matrix through the use of renewable sources of energy.
This Guide has been prepared with the purpose of helping foreign investors
interested in doing business with Cuba. The guide does cover the
most relevant aspects and answers the main questions investors may
have, including social and economic information about Cuba, and the
Mariel Special Development Zone, as well as practical information to facilitate
the establishment of businesses in the country.
In addition, this guide also refers to other laws, regulations and resolutions
adopted in the country for foreign investment.

 And oh yeah the Mariel Special Development Zone, the port built specific to cater to international trade was started in 2009 and is now home to several foreign business ventures, including German and other European companies.

The office of the Mariel Special Development Zone (ZEDM) announced that the enterprise PASI Mariel Service S.A. (PAMAS S.A.) was approved and constituted, thus concretizing the first German investment in that “strategic enclave” for the Cuban economy.

PAMAS S.A is an enterprise created with 100 percent foreign capital and is authorized to operate for a period of 30 years.

The enterprise will be dedicated to the construction of a factory for the production and assembly of industrial valves, hydraulic and pneumatic systems, dynamic equipment and its components.

It will also offer diagnostic, repair, maintenance and training services by technical personnel associated with these products.

Authorized to operate for a period of 30 years, PAMAS S.A. will use modern technologies for the development of its productions and renewable energy sources to generate electricity.

With this enterprise, the number of authorized businesses amounts to 48 ​​ and 21 countries have been represented in the ZEDM since five years ago, when it was inaugurated.

https://oncubanews.com/en/cuba/first-german-investment-in-mariel-special-development-zone/ 

Though with that said much of the previous opening up to the global market was regulated to Mariel and tourism and its adjacent industries, so assuming the reforms are carried through it will open up much more access to a lot more of the Cuban economy. 

This raises some questions, why now? Well the typical response is US embargo, which makes no sense at all since the embargo applies to private companies trading with Cuba. If the embargo is strangling the Cuban economy these reforms would do nothing to help, but that's really the thing its not the 1960s any more and the US embargo is not the crippling blow it was when it was applied to a Cuba whose entire economy was an appendage of the United States. 

That Cuba's economic activity with the USA is still heavily limited (though not non existent) is a constraint, especially being banned from buying American goods and services through credit, but its had decades to reorientate its economy. During the Cold War it essentially replaced the USA with the USSR, which is why the economic turmoil of the 1960s was repeated in the 1990s when that trade block disintegrated. But since the early 90s the Cuban economy has successfully re-orientated again, its biggest trading partner is China, but that's closely followed by multiple European nations and overall the EU seems to be the largest trader and investor. 

Graph source World bank

 The problem was much of that growth was in tourism and the export of luxury goods which due the COVID-19 pandemic have done incredibly poorly. It makes no sense for an economy under effective siege to tinker with investment policies, the source of the economic ruin is external and will remain unaffected, but it makes perfect sense for an economy already integrated and active in the world economy to pursue other opportunities once its main economic pillar is in trouble.

I know this is hard for people in the US to understand, but in the rest of the world Cuba is just another nation. Its not especially liked or especially condemned in the mainstream. Its a popular tourist destination and I've bought Cuban goods over the counter, though not often, they're usually well outside my price range. 

To be frank even during the Cold War the United States had a poor record of getting its allies to abide by the embargo, both Mexico and Franco's Spain ignored repeated attempts to pressure them into cutting off their trade with Cuba. And as the Cold War has ended that failure has only multiplied.

Unlike North Korea which the target of sanctions by many nations around the world and not just the United States, most countries have no issue with establishing a firm or booking holidays, or trading industrial commodities with Cuba. It doesn't bode well for the Cuban planned economy, this is probably the beginning of the full transition from state planning to market capitalism. In fact this seems to be proving Felix Abt correct, that far from undermining planned economies strict international sanctions actively prop it up and hold back the transition to market capitalism, since the measures put in place to damage state enterprises can easily break and cripple private ones.