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Mar 21, 2014 | 18:40 GMT

3 mins read

Cuba Tries to Modernize Economy

The Cuban parliament will meet March 29 to consider a new foreign investment law that promises to significantly alter the legal structure that has been in place since 1995. Though official details are scarce, the new law is likely to make significant changes to taxation, labor and the investment approval process. At stake is the future of Cuba's economy, which grows only slowly and suffers from decades of underdevelopment. Foreign investment could offer a much needed source of funds and new technologies if Cuba can attract it. Nevertheless, alongside the other economic challenges underway in Cuba, outside investment will also bring challenging social and political changes.

This is not Cuba's first experiment with foreign investment, but previous efforts have been hindered by political opposition and excessive bureaucratic barriers. The current regulatory regime was passed without the full support of former Cuban leader Fidel Castro, and while several hundred joint ventures have been formed over the past 20 years, it has not been a major driver of economic activity in the still largely state-dominated nation.

In order for the new laws to be effective, they will have to significantly reduce barriers to investment. For instance, in order to invest, companies must now go through an arduous and lengthy application process that requires the approval of the president himself. Taxes are high, particularly on labor, which is still contracted through the state instead of between the enterprise and the employee. Transparency is also extremely low in Cuba, with very little information made available to potential investors about existing contracts. Overall, the biggest impediment has been a strong disinterest in reducing the role of the state among the political leadership in Havana.

This appears to be changing, and after an internal political debate that has raged for more than a year, the government is moving forward with what are likely to be modest but significant changes. These changes are increasingly urgent as Cuba looks to the south at instability in Venezuela, which still provides billions of dollars per year worth of subsidized oil to Cuba — oil that Cuba will have a hard time affording on its own if the situation in Venezuela continues to deteriorate. Beyond that immediate threat, however, Cuba is already slowly evolving.

The fall of the Soviet Union left Cuba without external subsidies, and as a result the 1990s were extremely economically difficult for the island. Since that time, Cuba has turned to a moderately sized tourist industry and bilateral economic relationships with friendly states, including Venezuela, China and Brazil. With Venezuela's stability in question, Cuba is looking at a range of options. Economic reforms liberalizing the nation's domestic economy are already underway, but those will be slow and hampered by a lack of resources. China and Brazil offer some opportunities for partnerships, but nowhere near the level of Venezuela.

Economic evolution is an absolute necessity for Cuba, but there will be many challenges ahead. While Cuba may have its sights set on industrial development, its primary advantages are in tourism and sugar cane production. Cuba has begun to allow Brazilian partnerships in sugar cane production and may have an advantage in producing ethanol. Tourism is already well established in Cuba, and additional investment in that sector may produce only marginal additional gains. The biggest challenge, however, will be the social and organizational changes associated with integrating foreign investment more liberally into the state-dominated system.

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