Economic structure and foreign policy of Cuba

Cuba's New Relationship with Foreign Capital: Economic Policy-Making since 1990 Author(s): Emily Morris Source: Journal of Latin American Studies, Vol. 40, No. 4, Cuba: 50 Years of Revolution (Nov., 2008), pp. 769-792 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/40056741 Accessed: 20-11-2016 00:13 UTC

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Cuba's new relationship with foreign capital: economic policy-making since 1990*

EMILY MORRIS

J. Lat. Amer. Stud. 40, 769-792 © 2008 Cambridge University Press 7^9 doi:io.ioi7/Soo222i6Xo8oo4756 Printed in the United Kingdom

Abstract. This article attempts to analyse the nature of Cuban policymaking during the period of economic 'adjustment' since the collapse of the Soviet bloc by fo- cusing on one aspect: the opening to foreign capital. It outlines the widely-accepted characterisation of policy as a cyclical process and identifies the assumptions about the policy-making process that underlie it. Citing data on the changes in economic conditions and the sequencing of policy towards foreign capital in the post- 1990 period, it suggests that policy-making can be better understood as an evolutionary process. This conclusion has implications for the way in which we understand the renewed wave of reforms launched in March 2008.

Keywords: Cuba, economic policy, foreign direct investment, transition

Introduction

Cuba's opening towards foreign capital since 1 990 has aroused broad interest. For economists, the question of how far, and in what form, the Cuban economy is being integrated with the international capital market, can be seen as a test of the extent to which the state can control the insertion of a

national economy into the global market.1 The Cuban opening has also seized the attention of potential investors, but they have been wary and

Emily Morris is Senior Research Fellow at the International Institute for the Study of Cuba, London Metropolitan University.

* Much of the research cited in this article was carried out during the years that I was employed as Cuba analyst for the Economist Intelligence Unit in London (December 1 99 5 -May 2008) while also working on a PhD thesis at the Institute for the Study of the Americas.

1 The literature is large, with an annual conference on 'Cuba in Transition* convened by the Association for the Study of the Cuban Economy (ASCE) in Miami, US, providing a forum for the many contributions to the subject. For some, reforms are dismissed as insignificant because of the government's failure to embrace 'transition' from a centrally-planned to market economy, and the focus is instead on presenting strategies for the inevitable post- communist transition. Among the leading economists who consider reforms worthy of analysis despite being hampered by ideology are Carmelo Mesa Lago, Jorge Perez Lopez, Archibald Ritter and Jorge I. Dominguez.

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770 Emily Morris

unsure of how to interpret it. The slow and halting nature of the opening in comparison with the liberal regimes in formerly socialist economies of Eastern Europe, China and Vietnam has provided relatively limited invest- ment opportunities. The announcement of a new wave of reforms beginning in March 2008, including the expansion of private farming, liberalisation of some markets and decentralisation of administration, has raised expectations that the long-awaited ' transition ' may be approaching and with it, a renewed

expansion of the possibilities for foreign capital. Economists observing developments from outside Cuba have shared the

hopes and frustrations of potential investors. Ideology is perceived as an obstruction to progress on economic transition, one that restricts the degree of liberalisation of the treatment of foreign capital. According to this view, which has dominated foreign analysis of Cuban economic policymaking, the current signs of opening are part of a cyclical pattern of liberalisation and reversal: the ideological leadership is seeking to make sufficient concessions to ensure its survival, but eventually, after a period of several years, it will

seek to reassert state control.2 Therefore, the model suggests that the reforms

initiated in March 2008 are no more than a temporary cyclical shift. Similarly,

the opening to foreign capital is seen as a cyclical process, so that the space that has been made available for investors and lenders is likely to be tem- porary. But this article, by re-examining policy towards foreign capital since 1990, tests the policy cycle model and highlights its limitations. It suggests that Cuban policy towards foreign capital since 1990 might more usefully be characterised as part of an evolutionary, rather than cyclical, process.

A Model of Centralised Control, Obstruction and Cycles

The remarkably broad consensus about the nature of official policymaking that exists among economists observing Cuba from abroad has changed little

since the early years of the 'special period'. According to this view, Cuban government policy is driven from the centre, and progress and adaptation are

blocked by an ideological leadership. Cardoso and Helwege3 describe a system

2 The analysis of Mesa Lago, Perez-Lopez and Ritter consistently uses the cyclical pattern as a framework. See Carmelo Mesa Lago, * Economic and Ideological Cycles in Cuba: Policy and Performance* in Archibald R.M. Ritter, The Cuban Economy (Pittsburgh, 2004), pp. 3 5-41 ; Jorge F. Perez-Lopez, 'Rectification Redux? Cuban Economic Policy at the End of 2005*, Cuban Affairs, vol. 1, no. 1 (2006) pp. 1-13. The approach taken by Jorge I. Dominguez, in 'Cuba's Economic Transition: Successes, Deficiencies and Challenges', in Jorge I. Dominguez, Omar E. Perez Villanueva and Lorena Barberia (eds.), The Cuban Economy at the Start of the Twenty First Century (Cambridge, Mass. 2005), pp. 17-48 does not use the cyclical characterisation but nonetheless argues that ideological resistance has ob- structed the liberalisation process. Eliana Cardoso and Ann Helwege, Cuba After Communism (Cambridge, Mass. 1992), p. x.

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Cuba's new relationship with foreign capital 771

in which tight central control 'prevents Cuba from adjusting'. For Roca4, Cuba has been led by an ideological leadership into an 'economic labyrinth'. This view is supported by Mesa Lago5 who, using extensive quotes from the speeches of Fidel Castro, argues that the president's 'stubborn dogmatism' and 'aversion to market reform ... [his] willingness to smash those who oppose him and to take the whole nation with him in his opposition'6 have enshrined inflexibility on policy.

This perceived opposition between an ideological leadership and a path to economic progress that lies through liberalisation provides a framework for understanding the slow progress on Cuba's transition and its opening to foreign capital. It also informs much of the press commentary on the latest wave of economic reforms. It is modelled by Mesa Lago, who identifies a pattern of Cuban policy cycles that alternate between 'ideological' (cen- tralising) and 'pragmatic' (liberalising) phases throughout the post-1959 period.7 As evidence, he provides lists of policy measures adopted in each phase. In line with his underlying assumption that control of policy has been extremely concentrated at the top, this model identifies turning points in the

cycle driven by decisions by leaders. The switch towards a 'pragmatic' cycle comes when the economic realities threaten political stability; the switch towards an 'ideological' swing happens when the economy has recovered. Confirming his view that Fidel Castro continues to drive the cycle, Mesa Lago explains :

The role of the maximum leader is crucial in the generation of cycles. Despite many changes over the past forty-three years and some degree of politico-economic in- stitutionalization, Castro still concentrates considerable political power and makes the most important policy decisions. His customary preference for centralized decision-making, collectivization of the means of production, egalitarianism, and mobilization make him favor anti-market policies, but he has taken a pragmatist stand and reversed those preferences every time it has been necessary to save his regime.8

Mesa Lago argues that the cycles have continued since 1990, despite the collapse of the Soviet bloc and acute economic shock that followed. He characterises the government's initial response to the crisis in 1990 as the tail-

end of an ideological cycle begun in 1986, then detects a pragmatic wave from 1991-96 followed by a renewed ideological period since 1996.

4 Sergio G. Roca, 'The Comandante in his Economic Labyrinth' in Enrique A. Baloyra and James A. Morris, (eds.), Conflict and change in Cuba (New Mexico, 1993), pp. 86-109.

5 Carmelo Mesa Lago, ' Cuba's Economic Policies and Strategies for Confronting the Crisis ', in Carmelo Mesa Lago (ed.), Cuba After the Cold War (Pittsburgh, 1993), pp. 197-258.

6 Ibid., pp. 246-7. Carmelo Mesa Lago, 'Economic and Ideological Cycles in Cuba: Policy and Performance, 1959-2002', in Archibald R.M. Ritter (ed.), The Cuban Economy (Pittsburgh, 2004), pp. 25-42. 8 Ibid., p. 26.

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772 Emily Morris

Table i. Cycles in policy towards foreign capital

1990 to 1991 : Ideological (continuation of cycle begun in 1986) 1990 Rejection of transition.

1991 to mid-1996: Pragmatic 1992 Constitutional reform gives broader scope for private property. 1993-94 Legalisation of holding of US dollars, followed by expansion of dollar retail

trade.

1995 Foreign investment law (Decree Law 77) opens up all sectors except defence, education and health to foreign investment, permitting up to 100% ownership by the foreign company.

1996 Enabling law for the establishment of free trade zones (Decree Law 165). Signing of the first property joint venture.

Draft law on rules for foreign investment in property circulated.

Mid-1996 to 2001 : Ideological/stagnation 1997 Cuban Communist Party's 5 th congress endorses a cautious approach to

economic reform.

2000 Proposed changes to property law retracted. New joint ventures fall to lowest number since 1990.

2003 Foreign currency no longer to be used for transactions between Cuban entities. 2004 Free trade zones renamed "development zones" for productive, rather than

commercial activity; permits of the zones' existing trading and services companies revoked.

US dollar withdrawn from circulation.

2005 All foreign exchange transactions of over US$5,000 to require prior approval of the Central Bank's Comite de Aprobacion de Divisas (CAD).

According to this model, the pattern of cycles in terms of policies towards foreign investment can be discerned by simply listing the policy reforms during the period (see Table 1).

A Weakening Cycle or a New Model?

Mesa Lago acknowledges that changes have occurred since 1990. He notes that the 1996- 2001 cycle was weaker than previous ones as 'the process of economic reform has been either halted or slowed down' rather than

reversed, as in earlier cycles.9 He describes this as 'a stagnation'.10 The pre- viously observed cyclical pattern is further undermined by the subsequent extension of the cycle : by 2007 a full decade had passed since the end of the last pragmatic phase, breaking with Mesa Lago's observation that generally the cycles last between five and seven years. This lack of reversal and ex- tension of the post- 1 990 cycles weaken the explanatory and predictive power

of the model. In this article, we focus on the case of policy towards foreign

capital, where an opening that occurred at the start of the 1990s has remained

in place.

9 IbuL, p. 37-8. 10 Ibid, p. 39.

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Cuba's new relationship with foreign capital 773

To explain the apparent weakening of the cyclical policy pattern, Mesa Lago provides two explanations to accommodate the evidence by amending the model. The first concerns a break with the past due to external economic conditions: after losing the cushion provided by Comecon, Cuba was ex- posed to the global market, making reversals of periods of 'pragmatism' more difficult. The second rests on a more long-term trend arising from a generational shift. He suggests that by the 1990s the leaders faced a popu- lation 'exhausted after more than four decades of experimentations and promises, sceptical of idealistic targets, and more resistant against another cycle of severe deprivation'.11 Thus, the extension of the ideological cycle for an unusually long time is interpreted as further confirmation of the weakening

of cycles, rather than as a challenge to the characterisation of policy itself as cyclical. In this view, the economic reforms introduced in the domestic economy launched under the presidency of Raul Castro is interpreted as a new 'pragmatic' phase, providing renewed confirmation of the existence of such policy cycles, and confirming that the limits of the ideological phase have been reached as predicted, and that ideology is currently under retreat.

But the weakening of the cyclical pattern suggests that the model is in need

of review. In order to sustain the model, it is necessary to show that there is

still a pattern of cycles in policy, with phases of liberalisation followed by reversals, and that the cycles arise from periodic reassertion of the leader-

ship's anti-market ideology which eventually gives way to concessions forced by economic necessity. A re-examination of the evidence of the post- 1990 period casts doubt on these pillars of the model. Taking policy towards external capital as a case study, the following section accounts for the policy shift of 1990-91 in the context of the available data concerning the nature and depth of the changes in external economic circumstances arising from the collapse of Comecon. The evidence suggests a sharp break in policy towards foreign capital took place at that time in response to the trans- formation of external conditions, and that since then Cuban efforts to develop

foreign direct investment (FDI) and integrate with the international financial markets have demonstrated substantial continuity. On the basis of this evi- dence, the usefulness of an evolutionary, rather than cyclical, model is con- sidered as a framework to account for the process of change in Cuba today.

After Comecon: a Sharp Break in Policy Towards Foreign Capital

The idea of a cycle between ideological and pragmatic phases in policy rests

on the assumption that policymakers, in this case the political leaders, have

had the power to dictate policy. However, the available data for Cuba's

11 Ibid., p. 40.

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774 Emily Morris

Fig. i. Estimates of main contributions to import capacity: exports, current transfers and financing, (a) Official data show a net outflow of current transfers in 2005-2007. We assume this arises from a valuation of Cuban professional services donated under the agreements with Venezuela. In this chart the value attributed to these donated services is deducted from the

reported earnings from professional services that were traded rather than donated, (b) Official data show only net current transfers. We assume that before 2004, when the large-scale sale of professional services under agreements with Venezuela began, the level of outward current transfers was negligible, (c) These estimates are based on ONE data for the current-account balance, 1990-2007. The balance is financed either by net capital inflows or by the use of (i.e. net reduction in) reserves. For 1993- 2001 ONE data show a small annual increase in inter- national reserves, and the estimate of net capital inflows is the sum of the current-account deficit and increase in reserves. For 1 990-1 992 and 2002-2007 there are no official data for either the annual increase in international reserves or net capital inflows. In 1990- 1992 the narrowing current-account deficit and GDP contraction in 1990- 1993 suggest a depletion of international reserves combined with a decline in capital inflows; in contrast, in 2004-2007 the current- account was close to balance while GDP growth strengthened, suggesting that capital inflows were maintained and international reserves rose (the latter shown here as negative 'use of reserves'). Source: Author's estimates, based on the available data for goods and services exports, net current transfers and the current-account balance published by the Oficina Nacional de Estadisticas (ONE), Anuario Estadistica de Cuba.

external accounts indicate that policy towards foreign capital in the wake of the demise of the Soviet bloc in 1990-91 was driven by changes in inter- national economic conditions rather than any domestic policy cycle.12 The collapse in the availability of foreign exchange for imports - from around US$9 billion in 1989 to only US$2.6 billion by 1993 - created an imperative for policymakers to seek the restoration of access to foreign exchange.

12 The source of all the data used here is the Anuario Estadistica de Cuba, published by the Oficina Nacional de Estadisticas (ONE), unless otherwise stated. Room for reporting bias in trade data published by the ONE is small as the figures are the same as those used by the government, for which accounts have to balance. External accounts, being denominated in US dollar values, do not suffer from the problem of prices presented by official data for the domestic economy. However, there are problems of timeliness and completeness : at times publication has been delayed or selected series suspended on the official grounds that the information might be useful to the US administration in its efforts to damage the Cuban economy.

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Cuba's new relationship with foreign capital 77 5

The loss of financial inflows accounted for a large proportion of the total

collapse of foreign exchange following Comecon's demise. Balance of payments accounts show that of the total US$6.2 billion decline in import capacity between 1989 and 1993, the contraction in earnings from exports of goods and services accounted for around two-thirds (falling from US$6 billion to US$2 billion) and the disappearance in financing for the remaining third.

Within Comecon, Cuba had become dependent on generous supplies of Soviet loans and grants to cover its current-account deficit; capital inflows from other sources were negligible. When the Soviet support disappeared, Cuba's access to alternative sources of foreign finance was blocked by: (i) large debt arrears outstanding from the mid-1980s that deterred private lenders; (ii) US sanctions that barred official multilateral sources and also further deterred private lenders ; (iii) its lack of political allies, resulting in minimal access to bilateral official support; and (iv) the collapse in export earnings and economic output, which quickly led to a poor payments record on trade credits, so that this source of financing too dried up; suppliers credits were available only when fully-backed by claims on Cuba's rapidly diminishing export earnings, and even then, only at very high cost.

The total net inflow on the capital account reported by Cuban official sources includes both net inflows and the use of foreign currency reserves. The level of reserves is an official secret, and no data were published on annual changes in their level until 1993. It is therefore impossible to know how much of the current-account deficit in 1990- 1992 was externally financed, and how much was financed by using up reserves. But following the renegotiation of Comecon agreements to convert trade to hard currency at

market prices in January 1990, efforts to maintain bilateral preferential trade

and financing arrangements with the Soviet Union during that year finally

collapsed in 199113, and as no financing was available from other sources at that time the current-account deficit in 1991-92 must have been financed by

using up reserves. By 1993, the state was unable to guarantee the basic food needs of the population: strong evidence (in the absence of official reserves data) that international reserves had been exhausted. It is clear from OECD data that inflows of lending and grants from OECD countries were less than

US$50 million in 1993, insufficient to match repayments on previous loans from OECD official sources, resulting in a small net outflow.14 (The figure

13 Details of this process are described by Jose Luis Rodriguez Garcia, 'La Economia de Cuba ante la cambiante coyuntura internacional (I)', Economia Cubana, vol. 1, no. 1 (1991), pp. 5-10; 'La Economia de Cuba ante la cambiante coyuntura internacional (II)', Economia Cubana, vol. 1, no. 2 (1992), pp. 2-13.

14 OECD, Geographical Distribution of Financial Flows to Developing Countries, (Paris, 1998).

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776 Emily Morris

includes official funding from UN agencies and bilateral assistance as well as collections by non-government organisations.)

The lack of external finance sets Cuba apart from other transition econ- omies, where the adjustment was assisted by initial availability of official financing from multilateral institutions. In such cases the IMF, World Bank and European Bank for Reconstruction and Development played an im- portant role in the period before private capital inflows accelerated. The absence of official support meant that Cuba had the hardest budget con- straint - that is, the strictest disciplining by its opening to the international market - of any country of the former socialist bloc.

The importance of this fact -that by 1993 the Cuban economy was brought to near-collapse by the lack of foreign exchange - cannot be over- emphasised. In his 2004 account of the crisis, Jose Luis Rodriguez, an aca- demic in 1 990 who subsequently became minister of the economy, explained

simply that 'in 1990, the necessity to reform first the external economic policy seemed obvious, given the unfavourable changes in the international economic spheres. Reform was necessary to prevent a collapse'.15 The ur- gency of the situation explains why, by 199 1, when the Cuban authorities set

out their first major statement of policy in the economic resolution of Cuban Communist Party's 4th Congress, the potential forms and sources of external finance had already been evaluated. With hardly any access to official sources, Cuba was forced to look to the private sector.

The 1 99 1 4th Congress resolution refers to policy towards both foreign direct investment (FDI) and debt finance. With debt financing ruled out by both scarcity and cost, it was implicitly acknowledged that FDI would in- itially be the most important source of capital. Foreign capitalists would be more willing to provide equity financing than debt because their risk could be

offset by claims on earnings or capital. Article 6 of the resolution called for the authorities to seek new forms of foreign investment where such invest- ment would make a positive contribution to Cuba's development, while Article 17 accepted a longer-term process of restoring access to foreign borrowing, calling for Cuban official negotiators to begin efforts to open negotiations to reschedule debt and restore access. The relevant authorities were tasked with exploring 'flexible and reasonable solutions'16 to the problem of outstanding debt arrears.

15 Jose Luis Rodriguez Garcia, 'The Road to Economic Recovery', in Max Azicri and Elsie Deal, (eds.), Cuban Socialism in a New Century: Adversity, Survival and Renewal (Gainsville, 2004), pp. 149-62, quote p. 152.

1 IV Congreso del Partido Comunista de Cuba: Discursosy documentos (Havana, 1992), Resolution sobre el desarrollo economico, Artdculo 17, quoted in Gail Reed, Island in the Storm: the Cuban Communist Party 's Fourth Congress (Melbourne and New York, 1992), pp. 133-41.

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Cuba's new relationship with foreign capital jjj

Net external financing inflows are still well below the 1990 level and as a

proportion of national income are also below comparable levels in emerging economies. However, the Cuban economy has remained open to foreign finance since the 1991 policy statement. The following sections examine how the nature of the opening has evolved.

The Evolution of FDI Policy Since 199 1

The acceptance of FDI in 199 1 was not completely new. The opening to FDI had been made in 1982, when foreign investment in joint ventures was legalised. Between 1988, when the first was inaugurated (Corporation Cubanacan), and 1991, 20 joint ventures had been agreed, but the 1991 4th Congress resolution marked a clear break in terms of the emphasis it gave to FDI expansion. Since then there have been no reversals of this policy; in- stead, a constant process of review and adjustment has been under way.

The increased opening to FDI was enshrined in the 1992 constitution17, and then codified in foreign investment legislation (Decree Law 77, September 1995).18 These two developments are cited as evidence of Mesa Lago's 'pragmatic' cycle of 1991-96. However, it is not clear that they were entirely 'pragmatic' in the sense of representing a continuation of a liberal-

ising process. The 1992 constitutional reform set out the opening to new forms of ownership, but also stressed that this would only take place within the constitutional framework of the socialist economy; while the 1995 law was as much a check on foreign investment as an encouragement since it confirmed the government's role as gatekeeper, with every application to be appraised at the highest level. This was clearly stated in Article 1 which stipulated that the aim of foreign investment was to 'contribute to the country's economic capacity and sustainable development, on the basis of respect for the country's sovereignty and independence'.19 Cuban nego- tiators were required to appraise each foreign investment proposal in terms of the new finance, new markets or new expertise that the investment would

bring. This framework is still in place and continues to inform the periodic reviews of the priorities, regulations and licenses that have been carried out since its inception.

Moreover, data on the number of joint ventures with foreign capital over

the 1990-97 period (Figure 2)20 do not neatly fit the policy cycles as claimed, since the strongest net increase in the number of joint ventures registered in

17 Consultores Asociados S. A., Abstract of the Legislation on Investments in Cuba (Havana, 1992). 18 Republica de Cuba, Foreign Investment Law (Havana, 1995). Article 1:1, p. 3. 20 Source: Omar Everleny Perez Villanueva, 'The Role of Foreign Direct Investment in

Economic Development', in Jorge I. Dominguez, Omar Everleny Perez Villanueva and Lorena Barberia, The Cuban Economy at the Start of the Twenty-First Century^ The David

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778 Emily Morris

Fig. 2. Number of joint ventures with foreign partners in Cuba, 1990-2006. Source: Data for 1990-2003, from Omar Everleny Perez, The Role of Foreign Direct Investment, p. 172. Data for 2004-2007 from press statements on annual reports of the Ministerio para la Inversion Extranjera y la Colaboracion Economica, Havana.

Cuba was recorded in 1994, a year before the foreign investment law was introduced, while in 1997, when reversal of the 'pragmatic' policy cycle would have been expected to narrow the opening to foreign investment, the number of new agreements actually rose.

The declining trend in the number of new joint ventures between 1997 and 2002 has been read as a sign of an ideological backlash, but it can also be seen as a response to changing market conditions. This distinction between the perceived 'ideological' cycle and the maintenance of the opening to foreign capital was apparent in interviews with Cuban officials responsible for negotiating agreements.21 These officials, who were charged with im- plementing policy, tell of a constant process of review, in which the opening to foreign investors was adjusted in line with evolving economic conditions and Cuba's bargaining position as well as changes in strategic priorities. By 1997 import capacity had doubled from the 1993 level, and the worst of the crisis was over: food security had been restored and capital spending re- sumed. The Cuban state's need for foreign exchange was therefore less desperate, while negotiating experience had been accumulated. This increase

Rockefeller Center Series on Latin American Studies, Harvard University, 2004 Ch. 6, pp. 161-97. Interviews conducted during 12 research trips between 1995 and 2007. As interviews were off the record, positions are indicated but not names. Interviewees included members of negotiating teams at the Ministerio para la Inversion Extranjera y la Colaboracion Economica (Minvec), Ministerio del Turismo (Mintur), Camara de Comercio, Ministerio de la Industria Basica, Tabagest, Cubaniquel, Ministerio del Azucar, Ministerio de Comercio Exterior and Banco Central de Cuba. Annual interviews were conducted with Minvec and

Mintur negotiators; interviews with negotiators in other agencies were less frequent or one-off.

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Cuba's new relationship with foreign capital 779

in bargaining strength was reflected in the higher prices and more stringent

conditions demanded of the foreign party in any new agreement or in re- newals of existing agreements. Cuban negotiators described the review pro- cess in terms of investment appraisal techniques rather than ideology: foreign partners had to demonstrate that they would provide access to new capital, markets or expertise, and those that failed the test - generally the smaller concerns - had their licenses revoked. This shift was apparent to foreign business representatives interviewed.22 In some cases, the expertise of foreign partners that had been useful when Cuba had first been re- establishing its place in global markets was no longer needed as Cuban managers had acquired it for themselves. Some foreign partners perceived the shift as a betrayal or lack of gratitude for services provided during the worst times; others regarded it as a less unwelcome sign that the Cuban partners were behaving in an economically rational way.

Political developments also played a part in the decline in the number of new joint ventures. The US Helms-Burton law, introduced in early 1996, threatened sanctions against, and possible prosecution of, investors from third countries taking a stake in assets on which claims had been registered in

the US, thereby deterring potential business partners. This was the context in which debate on economic reform was suddenly curtailed23, and in which the

1 997 Cuban Communist Party 5 th Congress reviewed economic development priorities. But while the 5 th Congress endorsed a cautious approach to economic reform it also agreed to 'allow space for the functioning of market mechanisms ' and confirmed the opening to foreign investments. Castro in-

sisted in his opening speech that 'la inversion extranjera no nos gustaba mucho\

but he conceded its necessity: 6Si hay que buscar tecnologias nuevas, las tienen los

capitalistas 0 las hacen accesibles los que poseen el capital necesario. Si hay que buscar

mercados nuevos, si hay que buscar experiendas, las tienen muchos capitalistas; experienda

para produdr, experienda para administrar, la tienen. Es dear que las empresas mixtas 0

las asodadones que hacemos con el capital extranjero, no solamente resuelven probkmas de

fondo economicOy sino que resuelven otros importantes probkmas para el desarrollo9.24

The Congress reaffirmed the policy of selectivity in its approach to FDI, and decided that the most urgent need for foreign capital was to build (or

22 Interviews with a sample of representatives of foreign businesses operating, or seeking opportunities, in Cuba were conducted over the same period. These included two finan- cing companies, two business consultancies, a bank, a nickel company, a hotel and real estate investor, a travel agency, a ports services provider, a music promotion company, a tobacco company, a telecommunications investor and an auditing company.

28 The events surrounding the dispersal of researchers at the Centro de Estudios de las Americas (CEA) are fully described in Maurizio Giuliano, El Caso de CEA: lntelectuales e Inquisidores en Cuba. iPerestroika en la Isla? (Miami, 1998).

24 See http://www.cuba.cu/gobierno/discursos//i997/esp/fo8 1 097e.htm for Fidel Castro's opening speech.

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780 Emily Morris

Fig. 3. Net FDI. Sources: 1990-1992,3056 March Poquet, 'What type of Transition is Cuba Undergoing?', in Post Communist Economies, vol. 12, no. 1, 2000; 1993- 2001, Banco Central de Cuba.

rebuild) strategic capacity in capital-intensive sectors, including infra- structure, mining and energy. Negotiators were not prevented from using innovative approaches to securing new foreign investments, as illustrated by the 1999 agreement for the first 100 per cent foreign-owned joint venture, for a power plant in the Isla de la Juventud, while the number of joint ventures continued to rise until 2002. The radical reorganisation of the sugar sector that year included creation of a new, autonomous entity able to enter

agreements with foreign partners for sugar trading.25

A shift in emphasis towards partnerships involving large financial com- mitments at the end of the 1990s is reflected in data for the net inflows of FDI (see Figure 3). Despite the declining trend in the number of new agreements, available data to 2001 suggest that the flow of new FDI con- tinued, resulting in a steady rise in the total stock of FDI. Reported net inflows, figures for which are available only for 1993- 2001, have clearly been heavily influenced by a few large contracts, resulting in a 'lumpy' pat- tern in terms of annual volumes. But if we take the totals for the two

stages of the supposed policy cycle between 1991 and 2001, these suggest an acceleration rather than a deceleration for the 1997- 2001 period - characterised as the 'ideological/stagnation' part of the cycle - as average annual net inflows rose from US$184 million in 1991-96 to US$263 million in 1997- 2001.

25 Described by Philip Peters, Cutting losses: Cuba Downsides its Sugar Industry (Arlington, 2003).

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Cuba's new relationship with foreign capital 781

It should be noted, however, that the data are incomplete. Official sources26 provide data on net FDI inflows only, and only up to 2001. In most

developing economies, little difference exists between gross and net FDI inflows on the capital account, but in Cuba's case, a series of ventures in- volving Cuban investments abroad has been undertaken. These outflows, which are deducted to arrive at the net inflows figure, mean that the data shown in the figure in some years understate inflows. In some of the agreements - the nickel investment with Sherritt International (Canada) is the most important - the Cuban partner invested in physical capital in the

partner's country. In others, the foreign partner sold Cuba a share of a marketing concern - as in the case of an agreement with a European partner for the marketing of Cuban cigars - thereby providing an entitlement to a share of future earnings.27 Still other agreements have involved Cuban in- vestments in manufacturing or service facilities abroad, mainly in healthcare

and pharmaceuticals in non-OECD countries.28 The data therefore provide an incomplete measure of trends in incoming FDI, although they confirm that the net inflow continued between 1996 and 2001.

No official data for FDI flows have been published since 2001. Although the narrowing of the current-account deficit from almost US$700 million in 2002 to US$300- 350 million in 2003-04 might suggest a possible decline in net capital inflows, this is not certain as net flows include both debt repay- ments and any increase in international reserves as negative items. Interviews

and press reports suggest that from 2002 to 2007, the focus of the Ministry of

Foreign Investment and Economic Cooperation (Minvec) was on FDI in capital-intensive industries, which led a few large projects, including oil ex-

ploration, to dominate the flows. In reporting a net reduction in the number of joint venture agreements in 2003-06, with more terminated than initiated, Minvec claimed that the shift towards larger projects has meant that the volume of capital inflows has not declined in proportion.29 The investment

26 The data are from the Oficina National de Estadistdcas and Central Bank.

27 Joint venture agreements announced in the national press are reported in Economist Intelligence Unit Cuba Country Reports. The cigar distribution venture is covered in the 1st quarter 2000 issue, pp. 25-6.

28 The Cuban government does not publish details of these investments, although press reports in the Cuban and foreign press occasionally refer to them. Press reports of in- vestments in Iran, Malaysia, South Africa and Namibia are cited in a December 2003 report by the University of Miami's Cuba Transition Project at http://www.cubanet.org/ref/dis/ 12230301.htm. In the same month, Trabajadores (27 December 2005) reported that a bilat- eral collaboration agreement in biotechnology had been signed with China, and since then, according to officials interviewed at the Ministerio de Comercio Exterior, a series of in- vestments in biotechnology and health care have been undertaken in China.

29 At the end of June 2008, according to a report of the National Assembly's economic commission reported in the Communist Party newspaper, Granma, on July 9th (http:// www.granma.cubaweb.cu/2008/07/09/nacional/andcoi.html), the figure was 234, up

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782 Emily Morris

programme embarked on by Cuba and Venezuela under the auspices of the Alternativa Bolivariana para America Latinay El Caribe (ALBA) since 2004 ap-

pears to have made an important contribution to foreign investment. The largest of the joint ventures with Venezuela to date has been the upgrading of an oil refinery in the Caribbean port city of Cienfuegos. An agreement in

principle was signed in April 2005 and a joint venture created a year later. The US$100 million first phase was completed on schedule in December 200730, and associated investments in the port and further expansion of petrochemicals processing are planned, with potential spending reported to total US$i billion. Another important Cuban- Venezuelan project is a joint venture to link the two countries with a fibre-optic cable, planned for com-

pletion by early 20 io.31 Chinese investments have focused on participation in oil exploration and transport infrastructure. This latest wave of joint ventures

with Venezuela and China has illustrated the importance of political alliances

in driving investment, and has increased the share of FDI undertaken by foreign state-owned, rather than private, companies. However, new agree- ments with private investors from other countries have not been precluded.32

Since 2004 the energy sector has been particularly active in attracting foreign

investors, with companies from Canada, Spain, India and Norway becoming involved, and talks under way with Vietnamese and Brazilian partners.33

Two Special Cases of FDI: Real Estate and Free Trade Zones

In the specific cases of foreign investment in real estate and the development of free trade zones, the picture is different. An apparent move towards lib- eralisation in the mid-1990s ended with a reversal. In the case of the pro- posed opening of real estate, a draft law was in the pipeline for half a decade before it was abandoned in 2000. During the period when the law was under

discussion, negotiations with potential investors continued to take place and new joint ventures in property authorised under the 1995 foreign investment

law were agreed. In that year the first property joint venture was signed, for the rehabilitation and development of the Lonja de Comercio office block in Old Havana. In 1996, agreements followed for the construction and sale of

from 230 six month before, suggesting that, what one official described as the ' weeding out process ', may be over.

30 Reported in Granma, 21 December 2007, http://www.granma.cubaweb.cu/secciones/ petrocaribe/de-la-iv-cumbre/arti 9.html

81 Granma, 9 June 2008, http://www.granma.cubaweb.cu/2008/06/09/naci0nal/artic03. html

32 A summary of current Cuban inward FDI priorities is provided in Cuba Absolutely, a website prepared by and aimed at foreign investors: http://www.cubaabsolutely.com/business/ investmenthtml

38 Agreements with foreign investors have been tracked in the Economist Intelligence Unit's monthly Cuba Country Report.

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Cuba's new relationship with foreign capital 783

600 residential units in three projects in Miramar, a suburb of Havana. By mid-

1997, eight more agreements had been signed and 40 more were reported to be in the pipeline. The first time-share joint venture was signed in 1999.

When the announcement came in April 2000 that the proposed property law was to be abandoned, most existing joint ventures were dissolved and foreign partners compensated in accordance with contract terms; unsold properties were bought back by the Cuban state and projects not dissolved were renegotiated to allow the foreign partners leasehold rather than free- hold ownership.

We do not have access to the proceedings of meetings in which the draft law was debated, but according to accounts of Cuban officials and academics

who participated in them, sharp disagreements arose. Official negotiators, interviewed while the draft law was being debated, described the issues raised.34 They highlighted the concerns: the political * sensitivity' of property

ownership given the severe shortage of adequate housing, the challenge of 'the control of speculation', the worries that Cuban emigres would use third parties to buy homes, and a widely-held view that the ownership of Cuban real estate by foreigners would undermine the principle of 'sovereignty'. From the beginning, it was perceived that any reform of the housing market would have to be undertaken with care in order to 'preserve aspects of the revolution' in terms of equality. One academic economist who strongly supported foreign investment in property as a means to fund much-needed infrastructure investment described, during an interview in August 1 999 (by which time it was beginning to appear that the property law might be abandoned), that there had been hostility to the idea of foreign investment in

property from ordinary members of the communist party and trade unions at

local meetings.35 He reported with dismay and frustration, having attended meetings where he had attempted to explain the benefits of property joint ventures, that objections had been raised against the conspicuous difference

in the quality of new houses for foreigners compared with the poor condi- tions for Cubans. His testimony suggests that the rejection of foreign own-

ership of property might be explained as much by the weight of public opinion expressed at local meetings as by ideological resistance within the Cuban Communist Party leadership.

Although the new property law was abandoned in 2000, the opening to foreign investors in real estate has not been completely closed. A few foreign

34 Officials interviewed on this subject included an adviser to the Minister of Foreign Investment and Economic Cooperation in March 1995 and an adviser to the Minister of the Economy and Planning, August 1999.

35 This economist, who worked for the Centro de Investigaciones de la Economia Mundial (CIEM) assisted in the National Assembly's economic commission, and participated in local meetings in which the draft law was explained and discussed.

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784 Emily Morris

property investors remain in operation in Havana (including the Lonja del Comercio venture). In the wake of a decline in tourism in 2006-07, as me Ministry of Tourism has sought to develop a strategy for diversifying markets

and shifting to higher-earning activities, the question of property rights for foreign investors has been raised once more in connection with a proposal to build golf resorts with condominiums for sale or lease.36 This proposal is being assessed at the time of writing, illustrating the fact that policy continues to evolve.

In the case of the experiment with free trade zones, its abandonment appears to have been less contentious. Authorisation for the establishment of free trade zones was included in the 1995 foreign investment law, and in July 1996, the enabling legislation (Decree Law 165) was passed. In 1997, the first three free trade zones began operations ; the fourth and final zone was established in 1998. The following year, Granma, the official Communist Party newspaper, reported that a Minvec study of the functioning of the zones noted that of 243 enterprises operating within them, 160 were trading companies, 49 in the services sector and only 39 in manufacturing. The 1995 law (Chapter XV, Article 50) stated that the aim of free trade zones was to foster manufacturing for export as a means of helping to diversify the export

base and provide employment, so the low level of manufacturing activity was

reported as a disappointment. After a further five years, the picture had not improved. Strict regulation of labour costs37 and the absence of a US market for manufacturing exports resulted in the failure of the experiment. The overwhelming majority of enterprises enjoying the zones' special tax status continued to be foreign trading and services enterprises. In 2004, the free trade zones were redesignated as 'development zones' for the promotion of productive, rather than commercial, activity. The permits of trading and services companies in the zones were quietly revoked, and the businesses either closed or moved outside the zones.

In the cases of foreign investment in property and free trade zones, the

opening in the mid-1990s was experimental, and the eventual closure fol- lowed a process of review. The piloting of policy initiatives has been a fea- ture of the post- 1 990 adjustment. In both the real estate and free zone cases,

the decision to abandon the experiment was influenced by US sanctions. For free trade zones, the absence of a US market was one of the main reasons for

36 Interview with an official within the Ministry of Tourism, July 2007. 37 As a Cuban official working for the Free Trade Zones explained in an interview in 1997, the

zones were intended to provide employment but avoid reinserting Cuba into the global economy as a low-wage manufacturer. The justification given for setting the minimum monthly payment per Cuban employee higher than that of competitors in the region was that the level of education of Cuban workers was higher. Companies pay for labour in hard currency, while workers are paid in Cuban pesos.

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Cuba's new relationship with foreign capital 785

Fig. 4. Foreign debt stock by creditor type, and net annual increases in total stock. (a) Although CEPAL gives the Banco Central de Cuba as its source, there may be a break in the series in 2004. (b) Author's estimates, based on partial data published by the Banco Central de Cuba.

Sources: 1993- 2001 and 2004-2007, Banco Central de Cuba, Economic Report (annual); 2002-2003, CEPAL, Cuba: evolution economica durante 2006 y perspectivas para 2007 (November 2007), p. 33, based on Banco Central de Cuba data.

the experiment's failure, but for property joint ventures other difficulties and

objections, both social and political, played a greater part in the decision to abandon the opening.

The Evolution of Policy Towards External Borrowing Since 199 1

Policy towards external borrowing, like policy towards FDI, has evolved steadily since the initial break in 1991, with shifts in emphasis precipitated by

changing circumstances. The Cuban government's ability to secure foreign lending has been restricted throughout the post- 1990 period for reasons described above. In line with Article 1 7 of the 1 99 1 PCC economic resol- ution, a continuous process of adjustment within the financial system has been undertaken in an effort to improve Cuba's access to short-term credits

to facilitate trade and long-term lending to finance capital investment. There are no signs from the available data, or from interviews with policymakers or

foreign creditors38, that this process of reinsertion into the global financial system has altered significandy since 1991.

38 Between 1995 and 2007 a series of interviews were conducted with officials from the Cuban Central Bank (the Banco Nacional de Cuba until 1997 ; thereafter the Banco Central

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786 Emily Morris

The data in this area are sparse, and deliberately so : sources of external financing and the level of international reserves are regarded as issues of national security, given the stated policy of the US to seek to weaken the Cuban economy. However, the available information provides evidence of the limited access to external borrowing until 2004. Debt figures for 1990- 1993 are not available but the Central Bank has published data since 199339 (see Figure 4) that shows an average increase in the total foreign debt stock of just 2.5 per cent a year in 1993-2003. This is probably no more than the increase in interest arrears on the unserviced pre-1990 debt.40 The year- on-year changes in total debt during this period show net inflows only in 1994, 1995, 1998 and 2003. In two of those years - 1994 and 2003 - the net inflows disappear if adjustments are made for increases in interest arrears on unserviced debt and currency movements.41 This leaves only two years be- tween 1993 and 2003 in which there was a net inflow of external financing.

There are no published Central Bank reports that explain the increases in debt in 1995 and 1998, but both years followed a surge in FDI inflows. One of the three objectives of joint venture agreements, as noted above, was to obtain improved access to capital, and major projects involved finance packages involving foreign lenders, facilitated by the joint venture partner. In

1 99 5 , major investments in nickel mining will have drawn in much of the

new capital and in 1998 energy and telecoms investment and hotel building accelerated.42 In 1998 the debt was also pushed up by a US$500 million rise

de Cuba), and three interviews were conducted with representatives of creditors (one official in 1996 and three private, in 1998 and 2001).

39 Published in the Central Bank's annual Economic Report and the Anuario Estadistico de Cuba, published on the web by the Oficina Nacional de Estadisticas, at http://www.one.cu. There are no published data on the amount of interest arrears accumulated on the pre-1990 debt stock, but even if (as a Central Bank official affirmed) some of the debt carries no interest, the annual rate of increase of interest arrears is likely to have been at least 2. 5 per cent of the debt stock.

41 Data are from the Banco Central de Cuba, annual Economic Report. A gap in the series in 2002-2003 is filled with data from CEPAL, Cuba: evolucion economica durante 2006 y perspectivas para 200/ (Mexico, 2007), p. 3 3. In 1994, the increase in the debt stock was only 3.4 per cent. In 2003, the US dollar's trade-weighted value fell by more than 10%, increasing the dollar value of the debt that was denominated in other currencies. The Central Bank reported that in 2000, 70 per cent of the debt was denominated in currencies other than the dollar. No later figure is available, but given the efforts made by the US authorities to prevent third country lenders from using US dollars in Cuba-related transactions, it is likely that the proportion of debt that was non-dollar denominated had risen to more than 70 per cent by 2003. The currency adjustment in that year is therefore likely to have increased the dollar value of the debt stock by more than the 3.7 per cent rise reported, suggesting a net outflow of foreign lending in that year.

42 In 1998 a large investment in facilities for generating electricity from gas and the start of the digitalisatdon of the telephone network coincided with the acceleration in hotel building from an average of 1,700 new rooms per year in 199 3-1 997 to 3,500 in 1998 and 3,100 in 1999 (ONE figures).

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Cuba's new relationship with foreign capital 787

in outstanding suppliers' credits arising from a shortfall in sugar earnings, as both output and prices fell sharply.43

In interviews, officials at the Central Bank describe a continuing effort to improve access to, and reduce the cost of, foreign credits. At the start of the special period, officials complained that the interest rates charged by the very

few commercial lenders were among the highest in the world, hindering economic recovery. Representatives of foreign creditors argued that the in- terest rates reflected Cuba's restricted access to finance and payment delays, as the Cuban borrowers struggled to meet obligations amidst declining sugar earnings. As a result of the shortage of lending and high rates, Cuban buyers showed a strong preference for purchases of imports from those countries offering export credit guarantees, which improve availability and reduce the cost of credits. In 1990- 1994, while total spending on goods imports fell by 73 per cent, the handful of countries that increased exports to Cuba - France, Mexico, Spain, Canada, Holland and Italy - were generally those that offered favourable, officially-backed credit terms.44

The work by the Central Bank helped to restore access to credit and reduce its cost. Substantial and continuous effort was expended on nego- tiations with official and private creditors and an ongoing process of tightening

control of external liabilities was undertaken. These efforts, together with

rising foreign exchange earnings, helped to reduce payments delays, although the difficulties with sugar credits in 1998 were a setback.45 Following its creation in 1997 under Decree Law 197, the Banco Central de Cuba (the Cuban Central Bank) increased supervision and risk management, and restricted the accumulation of foreign currency liabilities.46 At the same time, Decree Law 198 established a new financial system, with a set of 'autonomous' state- owned banking corporations which are able to form joint ventures. The first

joint venture in the sector was signed in 1998 between the Cuban Banco Popular de Ahorro and Caja Madrid (Spain). Pre-1990 foreign debt arrears were placed on the books of a separate bank, the Banco Nadonal de Cuba, leaving the other banks with a fresh slate on which to build a clean credit history

43 The ONE's Anuario Estadistico de Cuba shows sugar output down by 24 per cent in the 1997/08 harvest year (from 4.3 million tonnes to 3.3 million) and 1998 sugar export earnings 30 per cent below their 1997 level, at US$599 miUkm. ONE figures show that between 1990 and 1994 imports from France quadrupled to US$21 5 million, those from Mexico trebled to US$250 m and those from Holland doubled to US$42 million, while imports from Spain rose by 25 per cent to US$226 million, from Canada by 3 5 per cent to US$83 million and from Italy by 20 per cent to US$i 10 million.

45 The evolution of Cuban creditworthiness has been tracked by the Economist Intelligence Unit's Country Risk Service reports (http/www.eiu.com).

4 Details of Cuba's Banking and Financial System are on the Banco Central de Cuba website, http://www.bc.gov.cu/Espanol/legislacion.asp

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788 Emily Morris

while negotiations for the rescheduling of the old debt continue. Both borrowers and lenders have been coy about the exact interest rates, but some reduction was reported between the early 1990s and early 2000s. However, by 2001 rates were still considered by interviewees on both sides to be high

relative to the degree of risk. A representative of one of the lenders described

Cuban business as highly profitable, or 'very good business' with 'low risk relative to the high returns ' as the payments record on new credits improved,

while an official at the Banco Central de Cuba bitterly described rates he considered to be usurious.

Cuba's access to foreign lending increased sharply from 2004, when Venezuela and China began to offer substantial credits on far better terms than those offered by their competitors47: total debt rose by around US$5.3 billion between 2003 and 200748, compared to US$2.5 billion in the previous decade. A breakdown between 'immobilised' debt, which refers to the principal and accumulated arrears on debt that has not been serviced since the 1980s, and 'active' debt, which is new debt that is being serviced, shows a US$3 billion net inflow of 'active' debt in 2005-07, while a decline in 'im- mobilised' debt (of around US$300 million) appears to be the result of re- scheduling agreements. As before, the relatively low cost of credit provided by some creditor countries has been associated with a clear increase in those lenders' share of the Cuban market: between 2003 and 2006 Venezuela's share of Cuba's imports rose from 15 per cent to 23 per cent and China's share from ten per cent to 17 per cent. In contrast, the share of imports accounted for by the US (which has been able to export agricultural goods to Cuba since 2001, but without credit) fell from seven to five per cent over the period.

With improved access to external credit the Cuban monetary authorities have moved to integrate the financial system more closely with international

financial markets. Joint ventures, the reorganisation of the banking system and improvements in credit record were followed in April 2006 by the first listing by the Central Bank, without fanfare, of €400 m of existing Cuban hard currency debt, in the form of one-year bonds with a 7 % yield, on the London Stock Exchange (LSE).49 A few weeks after the bonds matured in

47 Interest rates on Chinese trade credits, according to a senior Cuban Central Bank source, were less than half those offered by European creditors ; Venezuelan credits for oil pur- chases included both deferred repayments and concessionary interest rates.

48 Debt statistics are published by ONE, in its Anuario Estadistico, Cuba, 2006, at http:// www.one.cu/aec_web/paginas_de_tablas/p_vii/vii_i 1_12.htm. Debt estimates of 2007 are the author's estimates based on incomplete data from BCC, Economic Report 2007, p. 38. Listing particulars dated 30 March 2006, prepared by the Banco Central de Cuba. The listing was announced by the London Stock Exchange on 6 April 2006, at

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Cuba's new relationship with foreign capital 789

2007, the Central Bank issued and listed a second tranche, this time amounting to €200 million with a maturity of two years.50 Although Central Bank officials admit that none of these bonds have been traded, they have indicated that they regarded the listing through the LSE as an exercise in 'testing the water', and a dry run to practise the procedures and reporting requirements. The central aim, according to one of the Cuban negotiators,51 is to improve access to external finance and reduce the cost: to * optimi^ar el trabajo financiero j ajustarlo mas a los standards Internationales* or, in the words of

the Central Bank president, Francisco Soberon, to provide 6una prueba irre-

futable de la cretiente confian^a de parte de la comunidad economica international en la

seriedady honrade^ del gobierno cubano'.52

Within this drive to improve access to international finance, the bond initiative was designed to provide an opportunity, as the negotiator reports, to 'ganar experientiasj ajustar los procedimientos internos\ This refers not only to

building links with the international market but also to restructuring the domestic financial system. The bond issue helped to clarify the separation of functions between Cuba's state-owned banks and the government. It also continued the process of tightening Central Bank control of the use of foreign exchange as part of the effort to improve supervision and prevent payments difficulties. In July 2003, foreign currency used for transactions between Cuban entities was replaced the Cuban convertible peso (CUC), and in 2004 the US dollar was withdrawn from circulation in the domestic retail

sector. This was followed in 2005 by stipulation that all foreign exchange transactions of over US$5,000 would require prior approval of the Central Bank's Comite de Aprobation de Divisas (CAD).

The policies of the Central Bank towards the opening to foreign credits were essentially consistent throughout the post- 1990 period. At the outset,

Cuba's low credit rating, lack of allies and US sanctions barred access to international lending. Negotiations with creditors and the use of joint ven-

ture agreements started to restore some access and reduce the cost of bor- rowing by the mid-1990s. In the second half of the 1990s the reorganisation of the Cuban financial system provided the framework for further re- scheduling and financing initiatives in the early 2000s. The listing of the Cuban bonds on the LSE illustrates an approach to policy development in

http://wwwJondonstockexchangexom/I^ECWS/IFSPages/MarketNewsPopup.aspx?id= 1 1 9 5 766&source=RNS

50 London Stock Exchange Regulatory Announcement, 15 May 2007, at http://www. londonstockexchange.com/LSECWS/IFSPages/MarketNewsPopup.aspx?id= 1 48 29966c source=RNS

51 Antonio Villaverde Areces, 'Experiencias en la estructuracion de emisiones de bonos del Banco Central de Cuba', Revista del Banco Central de Cuba^ no. 2 (2007), p. 27.

52 Quoted in Villaverde, op cit.

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790 Emily Morris

which pilot schemes were used to allow review and assessment before fur- ther measures are introduced. In the event, the need to raise finance on international capital markets subsided from 2004 thanks to the surge in foreign exchange inflows from two political allies, Venezuela and China, but there has been no reversal of the opening represented by the bond issuance or of financial sector restructuring.

Conclusions

Although the economic policy of the Castro government since the advent of the 'special period' was a rejection of economic 'transition', the Cuban economy has undergone a profound reinsertion into the global market. Since the sharp break in policy in 1991, when opening to foreign capital was first declared, no fundamental policy reversals have occurred. This suggests that rather than a pattern of policy cycles, there has been a process of policy evolution, in which the rules of the opening may have been adjusted but negotiations have persisted. Foreign direct investment has been accepted as an important source of capital, as well as of technology transfer and market access. The stock of FDI has continued to grow, even though the number of joint ventures has diminished since 2002. Integration into global credit markets has been slower and more low-key, but the process of adjustment on the path to insertion has been continuous.

The characterisation of Cuban economic policy as a cyclical process sug- gests that policy is controlled tightly by the leadership, and in particular by the president, who is constrained only when his policy hits economic and political limits. However, observation of the evolution of policy towards foreign capital confirms that since 1991, far more actors have been involved

than is suggested by the cyclical model. Negotiators, academic economists and participants in public meetings have all helped to inform and shape the way in which the opening to FDI has evolved and it has been technocrats at

the Central Bank, rather than political leaders, that have engineered the gradual restructuring of the financial system and negotiations with creditors.

From the start, legislation on FDI and financial restructuring was deliberately designed to allow room for evolution, rather than following a predetermined path. The scope of the opening and the terms upon which foreign investors and lenders have been granted access have been influenced by the accumu- lation of expertise on the part of the Cuban negotiators. Having created an opening to investors, vice president Carlos Lage explained in an interview in a Mexican paper, El Sol, in June 1993 :

Para los proximos anos, las formasy los mecanismos se irdn enriqueciendo con nuevas ideas, con

nuevas propuestas. Incluso, dada nuestra insuficiente experienciay la novedad de esta politica, no

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Cuba's new relationship with foreign capital 791

hemos querido tra^ar demasiadas regulaciones por anticipado, sino que e'stas vayan acompanando el

proceso. Eso nos permite mayor amplitud en la toma de decisiones^

The evolutionary characterisation therefore describes policy as a product of the changing international and domestic economic conditions rather than of the leadership's alternating ideological/pragmatic inclinations. The above account has highlighted the link between the initial collapse in Cuba's foreign exchange resources in the early 1990s and the policy towards FDI and foreign lending that has been in place since that time. As the recovery picked up strength, Cuba's FDI priorities altered and as international economic inte- gration deepened, efforts were made to improve access to capital markets. The process of negotiations for access to both equity and loan capital was marked by continuous experimentation, review and learning. In response to the sudden leap in import capacity and economic growth since 2004 arising from expanding relations with Venezuela and China, the opening to foreign private investors narrowed, but it did not close. Similarly, borrowing from private financial institutions has diminished relative to new officially-backed credits, but the Cuban authorities remain keen to stay engaged with financial markets.

The differences between the cyclical and evolutionary model have im- plications for the interpretation of Cuban policy and for expectations about its likely future development. In the study of the 'transition' from centrally-

planned to market economies, the 'evolutionary' or 'evolutionary- institutionalist'54 model has been used to explain why Chinese reforms55 were relatively successful despite the comparatively slow progress with the liberalisation and privatisation considered to be essential to transition. Important to the relative success - despite the drawbacks of gradualism and partial reform - were the benefits of learning in the context of imperfect information and uncertainty, and of 'dual-track' pricing and enterprise re-

form that provided incentives to raise efficiency whilst minimising the costs of restructuring. Understood in this way, Cuba's opening to foreign invest- ment and lending can be viewed as a pragmatic and measured response to specific conditions rather than merely as a restricted concession liable to ideological reversal.

53 Carlos Lage: Interview in El Sol, Mexico, published in Granma, Havana, 28 and 29 May and 1 June 1993. Quoted by Miguel Figueras, Economia Cubana: Boletin Informativo, January 1994, p. 17.

54 A useful attempt at ' synthesising lessons from transition ', including an overview of the literature on the subject, is provided by Gerard Roland, Transition and Economics: Politics, Markets and Firms (Cambridge, Mass. 2000).

55 An influential work on the Chinese case is that of Yingyi Qian, 'How Reform Worked in China', in Dani Rodrik (ed.) In Search of Prosperity: Analytical Narratives on Economic Growth, (Princeton, 2003), pp. 297-333.

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792 Emily Morris

A Cuban economist, Pedro Monreal, has complained that in economic policy there has been 'no consensus vision, articulated in an explicit strategy

of development'.56 like many other economists inside and outside the country, Monreal considers this to be a major shortcoming. But the case of the opening to foreign capital illustrates that the absence of an explicit strategy has allowed room for decisions to be made through a range of mechanisms of consultation, experiment and review. Ideological conserva- tism may have played a part in the hesitant pace of reform, but changing economic conditions, the accumulation of expertise through trial and error, and public opinion have also influenced the process. The resulting slow and halting opening has disappointed both investors looking for new opportu- nities and economists looking for signs of transition, and has certainly re- sulted in lower foreign capital inflows than full liberalisation would have allowed. But like China's evolutionary approach, it has also permitted policy

to adjust in line with changing conditions and reduced the risk of ideological backlash. Cuba's integration with the international financial market remains underdeveloped and radical liberalisation remains off the agenda, but the model of an evolutionary process of opening suggests that, as institutions develop and the economy expands and diversifies, new spaces are likely to emerge for foreign capital.

56 Pedro Monreal, 'Racing Once Again to Catch up: Debating Prospects for Development in Cuba', introduction to Development Prospects in Cuba: An Agenda in the Making (London, 2002), pp. 1-6, Quote p. 1.

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