Is Cuba’s emergingentrepreneurial economyat the crossroa.docx

Is Cuba’s emerging
entrepreneurial economy
at the crossroads?
Richard C. Becherer
College of Business, University of Tennessee at Chattanooga,
Chattanooga,
Tennessee, USA, and
Marilyn M. Helms
School of Business, Dalton State College, Dalton, Georgia, USA
Abstract
Purpose – The Caribbean Island of Cuba, only 90 miles from the
US mainland, has remained one of
the world’s few examples of a centralized communist economy
since Fidel Castro overthrew the
government in 1959. The country has declined in recent years,
most significantly since the fall of
Cuba’s key trading partner and ally, the former Soviet Union.
Recently, under the direction of Fidel’s
brother, Raúl Castro, the island appears to be slowly loosening
some restrictions and promoting new
venture creation by allowing more private enterprises and
forcing laid-off state employees to consider
entrepreneurship. The purpose of this paper is to investigate
whether entrepreneurship will be the
answer to improving Cuba’s economy.
Design/methodology/approach – Using Graham’s framework of

conditions necessary for
encouraging entrepreneurship, Cuba is examined with actual
observations by the authors after a
July 2010 State Department-sanctioned research trip to observe
entrepreneurship within the
centralized economy.
Findings – Further enhancements to encourage new venture
creation in Cuba are identified, along
with areas for future research on new venture creation.
Originality/value – The value of this research lies in the fact
that there are many paths to create an
entrepreneurial economy in an emerging market. Cuba
represents a nascent entrepreneurial economy
with many barriers to overcome based upon its legacy of
communism. The country and market has
seldom been examined and there is a dearth of literature on
Cuba and other countries trying to move
immediately from communism to capitalism when their
economy is in crisis.
Keywords Cuba, Marxist economics, Capitalist systems,
Emerging economies, Developing countries,
Entrepreneurialism, Entrepreneurs, Small to medium-sized
enterprises, Economic development
Paper type Research paper
Introduction
Cuba’s economy has had many challenges since Fidel Castro’s
rise to power in 1959. The
US embargo from the 1960s restricted all trade with Cuba and
restricted American travel
to Cuba, further limiting tourism and Cuba’s access to hard
currencies (US Department

of State, 1992). The former Soviet Union then assumed
responsibilities for keeping the
Cuban economy afloat. With the former Soviet Union as a
dependable trading partner,
Cuba had stability with a consistent partner who provided a
number of key goods. The
Soviets too had a vested interest in seeing the Cuban
Communism model succeed. With
the collapse of the former Soviet Union in the early 1990s, the
situation changed. The
Cuban national income contracted by one-third and food
shortages and further rationing
was commonplace. This caused Cuba’s trading partners to shift
toward
The current issue and full text archive of this journal is
available at
www.emeraldinsight.com/1746-8809.htm
Cuba’s emerging
entrepreneurial
economy
369
Received November 2010
Revised November 2010
Accepted January 2011
International Journal of Emerging
Markets
Vol. 6 No. 4, 2011
pp. 369-381

q Emerald Group Publishing Limited
1746-8809
DOI 10.1108/17468801111170365
China and Venezuela. The 1996 Helms-Burton Act of the US
Congress further reinforced
and continued the on-going 1962 US embargo with Cuba.
Current reforms
Recently, some changes seem to be taking place within Cuba
that may alter the future
course of entrepreneurship. Eventually, the government could
lay off as many as one
million workers from their total population of 5.1 million.
Currently, 143,000 Cubans
have been authorized to work in the private sector (Rodriguez
and Haven, 2010). The
goal is to create 450,000 more non-state jobs in 2011 by issuing
more licenses for
self-employment, expanding the number of categories for
permitted work and loosening
restrictions for these work categories. Restrictions for obtaining
bank credit and doing
business with state entities will be lifted (Tamayo, 2010b).
Analysts wonder whether
this is the first crack in an otherwise frozen Cuban system
(Guerrero, 2010).
Given the challenges Cuba faces, what will be the effect of
recent reforms to allow
more private businesses? Can Cubans, whose basic survival or
the mere chance to enjoy

a small luxury, depended on finding a clever, illegal way around
the many government
restrictions move from having a guaranteed government job to
starting their own
businesses? By utilizing an analytical framework developed to
assess the
entrepreneurial pre-conditions of an economy, these questions
are examined in this
paper.
Methodology
Assessing entrepreneurial opportunity in Cuba
Paul Graham, founder of Viaweb (a web-based application that
allows users to build and
host online stores directly from their own web browser with
little effort or technical
expertise) which was earlier acquired by Yahoo and a well-
known commentator on
entrepreneurship, has outlined the parameters of entrepreneurial
clusters and necessary
and sufficient pre-conditions for a productive entrepreneurial
environment. From his
analysis, Graham (2006) developed a framework of key points,
entitled “Why startups
condense in the US” The paper uses Graham’s (2006)
framework of entrepreneurial
conditions to analyze the current Cuban situation based upon
the literature and
first-hand experiential social research conducted during a July
2010 study trip to Cuba
by the authors, both professors of entrepreneurship.
1. An entrepreneurial economy is open to immigration. An open
immigration policy
means the best and brightest from many countries, with new
ideas and energy, are

allowed to immigrate and put their ideas to work. Areas of
entrepreneurial excellence
like Silicon Valley in the USA are examples of thriving
entrepreneurship and
innovation and many of these new startups were founded by
entrepreneurs who had
been in the USA for ten years or less (Graham, 2006).
Nearly 200,000 people left the country in 1959 at the start of
Fidel Castro’s revolution
and then shortly thereafter, 250,000 more Cubans left their
home from 1965 to 1971 to
pursue opportunities in other countries. The Cubans who
emigrated were largely
middle- and upper-class individuals who owned businesses and
property and who had
the most to lose under communism. This exodus drained Cuba
of skilled professional
people with entrepreneurial mindsets. Many of these Cuban-
Americans now
operate successful businesses in the thriving Miami, Florida
economy in the USA
(De Salas del Valle, 2009).
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The Cubans who were born and raised in the communist country
after 1959,
however, have never experienced personal survival in an
economy where a job is not
provided. Cuba suffers both from losing several generations of

entrepreneurs after the
revolution and also from having a populace socialized not to
worry about self-initiative.
This communistic mindset has been an issue in establishing free
market economies in
other countries including Russia (Ray and Espiova, 2008).
Movement to self-sufficiency and personal initiative is scary to
individuals who have
no resources to begin self-employment. To stimulate
entrepreneurial development,
Cubans who left the country may have to return and assume new
venture leadership
roles. It is a natural evolution that those with an entrepreneurial
mindset gravitate to
areas of opportunity. Cuba must also begin to allow more open
immigration to welcome
all individuals who are seeking better opportunities. If Cuba is
accommodating, these
entrepreneurially oriented individuals will be an important
catalyst to stimulate and
re-grow the economy. They will also be responsible for training
and mentoring the
current generations of Cubans into the ways and techniques of
capitalism, free
enterprise, entrepreneurship and general business practices.
2. There is an inherent “speed limit” for entrepreneurial
development.
A country ready for entrepreneurship, according to Graham
(2006), is well developed
with an adequate power grid, good roads, utilities,
infrastructure, transportation options
and communication facilities. The infrastructure is key to
increasing the velocity of the
economy and creating an environment which can easily spawn

new ventures.
An inadequate infrastructure will limit the progress of
entrepreneurs with ideas.
Companies and industries dealing with a more primitive
infrastructure will be slow to
develop because the precursors for natural development are
limited or nonexistent.
As observed during the summer of 2010, Cuba has many
outward signs of a limited
infrastructure for entrepreneurial development including
abandoned facilities and
inadequate power, water and sewer systems. Buildings and
homes are in extreme
disrepair due to the constant barrage of storms and hurricanes
that have hit the island
over the years as well as the lack of building supplies for repair.
The power grid is old
and inadequate, with street lights not turned on, the airport
dimly lit and extension cords
strung as needed to provide power. Many buildings lack doors
and windows and the
sidewalks and streets are cracked and broken. Even the highest
rated hotels that are
outwardly and cosmetically upgraded to US and European
standards require trucks to
pump out their daily sewage. Cuba generally uses 110-volt
electric current, but lacks
infrastructure support, so most tourist hotels managed by the
Spanish have been rewired
for the two-prong European 220 voltage and plugs.
Communication infrastructure, such
as internet and land line phones must also be accessible for new
ventures to flourish.
With no real interstate roads constructed across the country,

even the movement of
goods from manufacturing to distribution centers and ports is
limited. The lack of good
roads for efficient distribution of crops is cited as a key failing
of the country’s food
production. Often, Cubans have an inadequate supply of food
and yet crops rot in the
fields due to lack of roads, working trucks for transport, limited
storage facilities and
scarce gas and diesel fuel. Ports, railroads and air transportation
must also be repaired
and expanded to be adequate for higher volumes of commerce.
Given the infrastructure
that currently exists and the issues faced by current visitors, the
current “speed limit” for
entrepreneurship development can be described as “glacial”
when compared to more
developed economies.
Cuba’s emerging
entrepreneurial
economy
371
3. Being able to freely exchange ideas stimulates creativity and
innovation. A visitor
to Cuba quickly realizes the country has little or no
communication with the outside
world. For Cuban citizens, there is no news other than the
Granma newspaper published
by the communist government and the only books available are
political ones touting

Castro’s successes in the revolution of 1959. When free thought
is forbidden and
creativity is discouraged to equalize everyone’s position in the
societal hierarchy, the
result is a repression of the basic reason that entrepreneurs
exist, independent action.
Entrepreneurs are moved by their freedom to test new ideas,
new technologies and new
processes that relate to opportunities they have identified. A
culture without the free
exchange of ideas will result in an environment unsuitable for
entrepreneurship
(Graham, 2006).
Since 1959, Cuba has allowed no outside newspapers or news
sources. The
country’s educational system has indoctrinated citizens with the
tenets of communism
since grade school. Propaganda is part of the regular
communication regimen, with
access to outside ideas (TV, internet, or international
newspapers) strictly forbidden
except for some limited options available for tourists in the
limited number of tourist
hotels. Open communication is the seed of innovation and
creativity in an
entrepreneurial culture. Marketing freedom is also necessary for
businesses to thrive
and grow and for nascent entrepreneurs to observe as they plan
new, innovative
products and services to bring to the market. On every corner
and along the roadways,
all the billboards are for socialist signs and slogans. There are
no advertisements for
products and services.

Historically, one reason for the large black market economy is
that many Cubans
were refused licenses by the state or they refused to pay the
high taxes required by the
government to start a small, private business. The newly
reformed tax structure and
proposed privatization system will more rigorously identify and
eliminate unauthorized
or black market businesses. If more licenses are issued for
private businesses and
entrepreneurship becomes more prevalent there may be
improvements in the ability to
exchange ideas, allowing for more creativity and innovation.
New reforms, however,
also include an income and sales tax and a 25 percent
employment tax for the
entrepreneur and each employee (Tamayo, 2010b). But by
allowing more authorized
businesses to operate legally, an entrepreneurial culture could
emerge. A pre-condition,
however, will be open communication so new ideas can emerge
and thrive.
4. Good universities provide good entrepreneurship partners.
The highest levels of
forward critical thinking exist in universities, which attract the
brightest faculty and
students to engage in thought and become a resource for the
development of ideas and
business practices via their institutes and various research
centers. Research at the best
universities sets the stage for other colleges and schools to
follow and emulate (Graham,
2006). High-quality universities are one key to
entrepreneurship. The prerequisite for a
high-quality university is to allow professors and curricula to

evolve with academic
freedom.
While the University of Havana has skilled professors and
qualified students, the
curriculum is largely a combination of communism and liberal
arts. This narrow
perspective on what can be taught and studied must be expanded
to become a complete,
diversified education. While tourism studies have recently been
added to the university
curriculum, true business administration and entrepreneurship
programs must be
developed.
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While the literacy rate is very high in Cuba (quoted as over 90
percent) and education
is free, even at the university level, true literacy goes beyond
being able to read and write.
With limitations and restrictions on what they can read and
write, Cubans are not truly
educated. Conversations with Cubans during July 2010
suggested that they did not
know about the existence of the Cayman Islands or Jamaica both
located less than
100 miles from Cuba. Clearly, the Cuban Government has
intentionally not taught
citizens about nearby locations fearing their exodus from the
country (Perez and Robles,

2010). New opportunities will not emerge until Cubans
understand other countries and
cultures, how the cultures and economies operate and how
entrepreneurs thrive by
meeting market and customer needs. This is the role of the
educational systems and
universities in a free market economy.
5. Entrepreneurs need to be able to hire and fire workers. Under
Fidel Castro,
a limited number of private businesses were allowed to exist as
long as they only hired
family members. Since Raúl’s reforms (The New York Times,
2010), businesses have
been allowed to hire outside workers (Tamayo, 2010b). This
could be a fundamental
turning point in allowing entrepreneurship to grow. Raúl Castro
insisted these reforms
are consistent with socialist ideals (Tamayo, 2010c) and that
Cubans must stop
expecting so much of the government (Frank, 2010).
Before the 2010 reforms, the Cuban Government controlled over
90 percent of the
economy. Under the new reforms, individuals may rent or
borrow state-owned facilities
and create cooperatives that could support individuals over the
next few years
(Darlington, 2010). The 26-page document from Cuban
Government outlining the
changes indicated a merit pay system for the best workers,
moving from the uniform
payment system (Haven and Rodriguez, 2010). But will workers
know or have the means
to be competitive since the only culture they have known
included a small but steady

paycheck?
While new enterprises will have taxes collected on wages, sales,
social security
payments for the retired and an employment tax (Rodriguez and
Haven, 2010), at least
under the reforms, entrepreneurs will have the possibility of
growing their businesses
and accumulating wealth. To maximize the opportunity,
however, entrepreneurs will
need the freedom to release certain workers and have flexible
hiring policies to adjust
to their business cycles.
A move to a more free market economy will be a difficult
transition for most
employees, but to attract the best workers, a merit-based,
flexible employment policy is
paramount. The ability to eliminate unproductive employees
who are not doing a good
job is important. Today’s Cuban workforce has been described
by Cuban leaders as
unproductive (Goldberg, 2010). Even the Castro Government
agrees many of the new
ventures will not be successful because owner-operators lack
appropriate education,
experience, skill and initiative. But most observers assert that to
improve the economy,
Cuba cannot continue to allow bad work habits, distorted
worker conduct and
unproductive government jobs to exist (Rodriguez and Haven,
2010).
6. Entrepreneurship works best in a dynamic labor market. In an
entrepreneurial
economy, work is less identified with employment. Individuals

in less-developed
economies, however, tend to totally identify with their job and
may work an entire career
in only one occupation. In more entrepreneurial economies,
employees feel free to move
among occupations, industries and companies to seek better
opportunities, more pay,
or more interesting work (Graham, 2006).
Cuba’s emerging
entrepreneurial
economy
373
With Cuba’s official unemployment reported below 10 percent
it would seem the
labor market is dynamic until the numbers and situation are
more carefully examined.
In 2009, the island’s unemployment was listed as 1.6 percent
which is significantly below
the regional Caribbean average of 7.4 percent (EIU ViewsWire,
2010a). But in their stated
unemployment numbers, Cuba does not count anyone not
officially registered for work
nor do they count people on payrolls that have no work to
perform. To maintain this
“official” low unemployment rate, Cuba has inflated state
payrolls and depressed
productivity in the country (EIU ViewsWire, 2010b).
In Cuba, employees have been traditionally assigned to jobs via
screening systems in

place and imposed by the government. The government
currently offers two or three job
options after students are assessed in their secondary education
program, but once a path
is chosen it is difficult for Cubans to change vocations. Cuba
has historically authorized
only 124 private enterprise occupations such as toy repair or
piñata maker. The reformed
system of 2010 authorizes additional categories such as raising
rabbits and making bricks
(Stanglin, 2010). To inspire a free market economy, there
should be no categories to fit into.
Some of the best opportunities may represent new venture
employment options never
imagined and not previously “categorized” by the government.
The September 2010 plans to lay off over 500,000 public sector
workers over a
six-month period and allow more private sector jobs
(Darlington, 2010) will make the
labor market more dynamic. While he previously announced in
August 2010 the
layoffs would be phased in over five years, Raúl Castro
increased the pace, indicating
job cuts will be completed by April 2011 (EIU ViewsWire,
2010c). This is a good sign
for faster reform.
The job categorization system utilized by the Cuban
Government generally restricts
private enterprise to what is best termed “lifestyle” jobs. These
businesses will provide
entrepreneurs with a means of making a living, but they do not
create companies with
employees or significant economic value (Timmons and
Spinelli, 2009). New ventures

which have a team of entrepreneurs, startup capital and a
business plan designed to
create a new economic entity that can exist and be productive
on its own must be the
focus. These companies are the foundation of a free market
economy.
While nearly everyone is technically employed under what has
been described
as “extreme socialism” (i.e., Fidel Castro’s softer term for
communism) there is very
little freedom of expression or personal liberty and only the
most limited possibility
for personal initiative in a few classes of private employment.
Workers in Cuba are
concerned and worried about their future but are reported to be
hopeful that in the
slowly emerging private-sector system their wages can exceed
the current equivalent
of US$20 per month (Mahalo.com, 2010).
7. Create an entrepreneur-friendly environment.
Entrepreneurial-friendly
environments make it easy and straightforward to obtain a
business license,
a business location and comply with regulations. In less friendly
entrepreneurial
environments, the process of obtaining the right to start a
business is complicated and
lengthy, requires extensive regulation and extremely high fees
(Graham, 2006).
As part of a new plan to privatize more of the economy and
expand tourism, the
Cuban Government’s Decree Law 273 of July 29, 2010 allows
outside foreign investors

to lease land for 99 years instead of the original 50 years. Cuba
also announced foreign
investors were planning four golf resorts to include a marina,
housing and boat slips
(Tamayo, 2010a). Golf course developers include Native
Americans from Canada,
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as well as British and Spanish investors. It should be noted a
similar golf development
in 1995 was unsuccessful because it was plagued with
corruption and did not include
housing for Cuban workers (Tamayo, 2010a). But tourism is
seen as the fastest way to
tackle the economic crisis (Castillo and Gaspar, 2002;
Wilkinson, 2008).
Historically, Cuba has closely regulated all aspects of their
economy and they
have traditionally had high fees and taxes associated with the
limited private
enterprise that existed. This type of central and paternalistic
behavior will make it
difficult to create an entrepreneurial economy. Cuba needs
entrepreneurship-friendly
processes for startup and easy to understand and follow rules
for operating a business.
Such an environment will encourage individuals to enter the
private sector. Other
issues to address include taxation and employee regulations,

permits, construction and
manufacturing regulations. The 2010 monthly quota (fees to the
Cuban Government
for conducting private enterprise) averaged US$15. However,
the fee structure is
scheduled to rise under the new program.
Cubans have had a culture of being resourceful in leveraging
their resources, making
do with less and being creative by finding solutions to the
problems of daily living. Ritter
(1998) pointed to the existence of entrepreneurship in Cuba
within a market-oriented
setting even when such activity was effectively prohibited.
Instead of converting Cuba
into a socialistic country, the revolution has promoted
widespread values, attitudes and
behaviors of entrepreneurship as Cubans have had to barter,
network and hustle to
improvise solutions to their problems of sustenance and
survival. The black market,
Ritter (1998) asserts, has helped to create microenterprises.
After the collapse of the
former Soviet Union, the expansion and diversification of such
micro-entrepreneurial
activity in Cuba has been impressive. He believes the
entrepreneurial potential exists in
significant volume in Cuba but just needs “unlocking” with
proper policy reorientations
and initiatives to encourage new venture creation.
With Raúl Castro’s proposed reforms, private restaurants will
be allowed up to
20 seats for customers (up from 12 seats) but they will be
competing with state-run
restaurants in the tourist districts that have no such seating

limits (The Wall Street
Journal, 2010). To promote an entrepreneurial economy, it is
critical that Cuba, like
most governments, does not create public entities that
aggressively compete with
private enterprises.
One of the first examples of Raúl’s free-market experiment was
allowing private
Cuban barber shops and beauty salons. After these formerly
state-run entities
privatized, by obtaining a license and paying a 15 percent tax to
the state, they were
free to set their own prices (The Los Angeles Times, 2010). One
concern by some Cuban
observers is that the free-market experiment will only lead to
move government
corruption (Haven and Rodriguez, 2010) as the monies collected
from these newly
privatized ventures are likely to remain with the government
and will not be spent for
needed infrastructure improvements in the country to benefit the
citizens.
8. Larger domestic markets create more prospective customers
for new ventures.
Unlike the USA with over 300 million people, Cuba’s
population of 12 million people
represents a relatively small domestic market for trade and
commerce. For
entrepreneurship to thrive, entrepreneurs will need to serve
larger markets, obtain
supplies internationally and sell exports on a world market. This
will require Cuba to
create more trade relationships, including a relationship with
the USA. The proposed

Cuba’s emerging
entrepreneurial
economy
375
reforms may create an environment to again open up a dialogue
with the USA to lift or
modify the on-going embargo.
Clearly, there are currently extreme shortages in goods and
services. Cubans were
observed stopping tourists on the street begging for products
they desperately needed
like soap and ibuprofen. Because retail stores lacked any
quantity or assortment of
goods, Cubans begged for products rather than money. A typical
retail store had only a
few tourist t-shirts with the likeness of revolutionary leader
Che’ Guevara, a few
towels, several small infant blankets, a few pairs of socks and
underwear and some
deodorant. Toilet seats were nonexistent except for the best
hotels. Cubans could be
seen standing in line when there was word of new products or
inventory arriving.
Cuba is the largest country in the Caribbean, yet other
Caribbean countries have
more developed and successful economies. Cuba could join
forces with CARICOM, the
Caribbean common market and obtain the benefits of trading in

a common market
arena (Caribbean Community Secretariat, 2010). Cuba’s rich
resources of nickel, sugar
cane and tourism options make them a viable trading partner
with many other
countries.
9. Entrepreneurs need some source of funding. Startup capital
funding is required to
support new business ideas. Most entrepreneurial economies
have well-developed
banks and the presence of angel investors, small business
advocate organizations and
business incubators, loans and grants for women and minority
businesses and venture
capital organizations. Venture funding and banking is essential
for sustaining an
entrepreneurial economy. Similarly, rules and procedures for
contracts, investments in
business structures, shareholders, safeguards and legal ways to
invest are needed.
Rules and procedures must also be designed and enforced so
investors have confidence
to make needed investments so businesses can perform and
prosper.
Since most Cubans with assets left the country in the 1960s and
are now living
abroad, it will be necessary to attract investment from other
parts of the world.
Already Spain, The Netherlands and Venezuela have strong
trade relationships. These
countries might be excellent sources of foreign capital. Cuban
expatriates in the USA
have a great deal of hostility toward the current Cuban regime,
but they may be

attracted to return if the USA lifts restrictions and a deal can be
made regarding
control of the properties they previously owned.
In Cuba the laws, rules and procedures do not give today’s
investor confidence. There
are no sources of capital within Cuba and no one has experience
with investments or in
even screening potential business ideas. Also needed are all the
structures to attract
external capital, to become a public company and eventually
establish a Cuban stock
exchange for initial public offerings (IPOs). Also a single
convertible currency will be
required rather than the regressive dual currency system
employed today with Cuban
citizens paid in the lower value Cuban pesos and more valuable
convertible Cuban notes
used by tourists. Ultimately, issues of repatriation also must be
resolved with
assurances profits can be reinvested or taken out of the country.
Cuban entrepreneurial economy – macro perspective
When Cuba is compared to Asian, European or Latin American
countries that
transitioned to a market economy, it is clear there is a precise
process that works best
to change the economy and avoid mass unemployment, severe
inflation, or recession.
According to Castañeda (2005), the three synergic components
of this transition are:
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(1) institutional building and strengthening;
(2) macro economic stabilization and liberalization; and
(3) microeconomic restructuring.
It would appear the Cuban Government does not plan to follow
this sequence in their
reform proposals.
The legal and institutional building and strengthening is
designed to create legal
entities and rules and procedures add confidence regarding
economic stability to
prospective entrepreneurs and investors. Very little has been
done since the revolution
other than lengthening land leases to appease foreign investors.
Property ownership
remains an important aspect of entrepreneurial activity. To the
extent these issues still
remain as ideological hurdles in Cuba, real entrepreneurship
will be limited.
The process of macroeconomic stabilization and liberalization
refer to the policies
surrounding currency, tariffs and taxation that can provide an
environment of
consistent and logical rules and regulations. To the extent the
Cuban Government is
inclined to continue to operate two parallel currencies and
utilize tariffs and taxes to
simply prop up the other shortcomings in their economy, foreign
investors will be very

wary.
The only area the Cuban Government has tried to improve the
entrepreneurial
environment is in the microeconomic restructuring aspect of the
economy.
By encouraging and expanding private enterprise activity, the
government
demonstrates a willingness to explore additional options for
work and employment.
But the sudden release of 500,000 workers will create such a
chaotic labor environment
that only the strongest individuals with initiative will prosper.
The microeconomic
aspect of the economy synergistically depends on the other
critical dimensions to fully
function productively. It appears the Cuban Government is not
likely to reform all
aspects of their system, a fact that may hamper early initiatives.
Discussion
While some observers may feel the announced reforms are
attempts to move Cuba to
more of a market economy model similar to China, there are
some distinct differences.
The Cuban move toward privatization seems to be motivated by
a recognition Cuba is
out of options in turning around a struggling centralized
economy. The subsidies
formerly provided by the Soviet Union and now to a lesser
extent by Venezuela are the
only reason the model has functioned at all. To remove 500,000
workers from the
government payroll seems a sign the government is willing to
consider other options.

In China, the government made the move to a more market
economy via careful
central planning, not a sudden change in government
employment options of a large
segment of the workforce. In fact, the process used in China
was so successful it outpaced
the rate of reform in similarly situated Eastern European
countries transitioning from
the communist model (Qian and Wu, 2000). By maintaining a
stable economic system
with employment opportunities, China has also made political
gains. After several
decades of reform, China may finally be able to reach a level of
60 percent of America’s
GDP (Sumner, 2010). China has evolved into what Ian Bremmer
has labeled a form of
“state capitalism” (Asia Times Online, 2010) which might be a
worthy goal for Cuba.
China knew it needed more economic growth as a means of
achieving political stability.
Cuba’s emerging
entrepreneurial
economy
377
It would appear the current level of political stability in Cuba,
however, is not yet at a
crisis level, but after massive layoffs, political stability may
soon be in question.
Changing the culture for new venture creation in Cuba will

require a change in the
mindset by individuals as well as require access to low-cost
capital, tax incentives or
exceptions and the availability of management advice, business
incubators and other
conditions to foster business creation. Social and environmental
issues too must change.
State-trained Cuban economist, Oscar Espinosa Chepe’,
applauded the new reforms but
agreed Cuban authorities will need a complete ideological
reform to allow private-property
reform and other initiatives to work successfully (Weissert,
2010). Layoffs of government
employees will certainly create short-term unemployment but
may lead to higher
long-term wages for those in the private sector (De Córdoba and
Casey, 2010).
Currently, 591,000 workers are reported to be employed in the
private sector in Cuba,
either self-employed or working for a foreign company
operating in Cuba, like most of
the Spanish-run hotels. There are 143,000 of the 591,000 who
are self-employed, in the
limited private enterprise previously allowed under Fidel
Castro. The major obstacles
limiting entrepreneurship are the excessive taxes, the lack of
access to credit and foreign
exchange, the ban on advertising, limits on hiring and excessive
government regulation
and red-tape (De Córdoba and Casey, 2010). Cuba has 124
approved activities for those
who want to be self-employed such as toy repair, music teacher,
carpenter, or piñata
sales. While the categories will likely be expanded, these
endeavors would generally be

classified as “salary substitute” or “lifestyle” companies that
are unlikely to create
inherent economic value (Timmons and Spinelli, 2009). One
additional reason cited for
slow economic growth in the past is that foreign investment has
historically been
restricted to joint ventures with the government (De Córdoba
and Casey, 2010). Foreign
capital has only been allowed in this one narrow segment of the
overall economy and
typically this has been in the management of tourist hotels by
the Spanish.
There has been a conflict between those who want economic
freedom and the
government’s desire to control. Creating a system with
increased taxes and other
financial obstructions will not allow the private enterprise to
work. Already the
privatized barbers who are now renting their former state-run
barber and beauty shops
are complaining about their high taxes. According to Carmelo
Mesa Lago, University of
Pittsburgh professor and noted expert on the Cuban economy,
the government should
delay collecting taxes until new private businesses are
established and profitable
(Tamayo, 2010c).
The problems that many forecast for the new Cuban economic
system are excessive
government-imposed control, increased taxes and fees which
will hinder economic
activity. A concern is that the government may want to be
involved in the private
management of the enterprise with such activities as pricing,

determining where
cooperatives could sell their products and requiring that only
the government can
provide the agreed-upon supplies like fertilizer and
transportation (Tamayo, 2010c).
Areas for future research
The future of Cuban reform is uncertain. Some believe the
economy will result in a hybrid
model. Dropping the US trade embargo is a necessary step. The
Cuban-Americans in
Miami, the original 1.5 million entrepreneurs who left the island
in the early 1960s must
also work with the 11 million Cuban population (The
Economist, 2007) of young, mainly
black or mulatto individuals remaining in Cuba (The Economist,
2008).
IJOEM
6,4
378
It is not clear if the Cuban Communism, which has differed
from Eastern Europe, will
follow a different pattern to market reform (Tamayo, 2010d).
Research should compare
the changes in China, Russia and other countries to draw
parallels as well as highlight
differences. Still other research should consider possibilities for
foreign investors in the
country beyond tourism and could include deepwater oilfields
and offshore drilling.

Case studies of privatization of businesses as well as studies of
emerging businesses
and their paths to growth are needed. Typically, younger people
more quickly adjust to
such massive economic and social change. Studies of
differences in employment and
new venture creation among older Cubans versus younger would
be an interesting
study. Studies of life cycles of business development would also
be of interest to other
emerging and developing markets.
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About the authors
Richard C. Becherer holds the Clarence E. Harris Chair of
Excellence in Business and
Entrepreneurship at the University of Tennessee at Chattanooga.
He has had extensive experience
both as an academic Marketing Professor and as an
entrepreneur. He co-founded one of the first
for-profit health maintenance organizations in the USA and has
also been involved in several other
business startups, including a marine business and a plastic

injection molding business.
Dr Becherer received his doctorate from the University of
Kentucky and primarily teaches
entrepreneurship and marketing courses. He has published
numerous journals articles in titles
such as Entrepreneurship Theory & Practice, Journal of Small
Business Management, and Journal
of Marketing and Decision Sciences. He was the 1993 winner of
the Coleman Foundation Award for
the best research paper at the 1992 University of Illinois-
Chicago American Marketing Association
Research Symposium on Marketing and Entrepreneurship. In
1998, Dr Becherer received the
Edwin M. Appel Prize presented each year at the Price/Babson
College Fellows Program.
Marilyn M. Helms is the Sesquicentennial Endowed Chair and
Professor of Management at
Dalton State College. Prior to joining DSC in 2000, Helms was
the UC Foundation and George
Lester Nation Centennial Professor of Management at the
University of Tennessee-Chattanooga
and Directed the Institute for Women as Entrepreneurs. She
holds a DBA in Management from
the University of Memphis. She teaches Entrepreneurship and
Strategic Management. Dr Helms
has published articles on manufacturing strategy and
entrepreneurship in Journal of
Developmental Entrepreneurship, Business Journal for
Entrepreneurs, Competitiveness Review,
Academy of Entrepreneurship Journal and Journal of Business
Strategies. Dr Helms was awarded
a Fulbright for teaching and research at the University of
Coimbra in Portugal. She writes a
column on business trends for the Dalton Daily Citizen and
shares in the operation of a family

pest control business. Marilyn M. Helms is the corresponding
author and can be contacted at:
[email protected]
Cuba’s emerging
entrepreneurial
economy
381
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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
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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.
2016 00:13:57 UTC
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.
2016 00:13:57 UTC
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.
2016 00:13:57 UTC
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.
2016 00:13:57 UTC

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.
2016 00:13:57 UTC
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.
2016 00:13:57 UTC

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).
2016 00:13:57 UTC
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.
2016 00:13:57 UTC
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
2016 00:13:57 UTC

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.
2016 00:13:57 UTC

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.
2016 00:13:57 UTC

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).
2016 00:13:57 UTC
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
2016 00:13:57 UTC
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.
2016 00:13:57 UTC
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.
2016 00:13:57 UTC
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.
2016 00:13:57 UTC

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
2016 00:13:57 UTC
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

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