Leadership and Democracy LabWestern Social Science

Rules and Regulations: Cuba’s Centralized Socialist Economy

Team Leader: Mary Peplinski

Primary Author: Timothy Gopaul

Key Words: Foreign direct investment, state-owned enterprises

Cuba, a small Caribbean island that is shared with the Dominican Republic, is a unique place for investment solely because it remains one of the last existing state controlled economies in the world. The rules and regulations for foreign investment remain strict with its skepticism towards capitalism, but are slowly encouraging foreign direct investment as diplomatic relations with the United States undergo transformation. Cuba is characterized as a centralized socialist economy with 90% of its economy being owned by the state and their State-Owned Enterprises (SOEs). In addition, 80% of Cubans that are considered part of the workforce are employed strictly through the state. Foreign direct investment into Cuba requires extreme caution based on the economic system that currently exists. Strict approval processes through the state, price controls that affect investment profitability, and labour contracts through the government of Cuba all remain complex obstacles to investing in a centralized socialist economy.

While there are weaknesses to investing in a state controlled economy, there are also steps that Cuba’s National Assembly have taken to ensure that foreign direct investment will improve in the upcoming years on the island. On March 29, 2014, Cuba reviewed and updated the ‘Foreign Investment Act’ that essentially set new rules and a legal framework for investments by foreigners within the country. The update is the first since September 5, 1995, and provides a greater incentive for investments to develop a stable economy through 11 priority sectors, one of which includes tourism. Foreign companies that meet the approval process are able to initiate foreign direct investment in one of three ways: a joint venture company (JV) with a partnership from an SOE, the International Economic Association Contract (IEAC), or a full foreign-owned venture. In addition, foreign investment companies can import and export directly without having to rely on state companies to provide their goods or services. This would allow foreign firms in the tourist industry the flexibility to import day-to-day products (I.e. food, blankets, towels, soap, shampoo) at their own costs without having to rely on state companies to deliver. It would also allow the purchase of cheaper products for investment companies that would otherwise be forced to purchase overpriced goods in the operating country. The government of Cuba also ensured to let foreign investment companies know the status of their application throughout the 60 day process before it is accepted or rejected. Foreign investors are now given awareness on the status of their application that can relinquish the stress that occurs with a multi-tier approval process from the state. The corporate tax-rate has diminished for JVs to 15%, which is a reduction from the 30% that Cuba previously had it at. The disadvantage to the corporate tax is while certain industries are exempt from the tax altogether for the first eight years of their operation, hotels and production and service industries are not. This means that while many industries are exempted from a corporate tax for the first eight years, and then pay the reduced 15%, companies investing in tourism are required to pay a corporate tax from the moment the company starts its operations.

Various issues that still exist even with the improvements made to the Foreign Investment Act which include: employees being hired through the state, and full-foreign ventures only being approved for a fixed time period. Foreign investors are obligated by Article 30 in the Foreign Investment Act to have no input in the hiring, or firing of employees. All labour relation matters are handled by the Ministry of Labour and Social Security in accordance to the Ministry of Foreign Trade and Investment. Employment agencies set up by the state decide on the hiring, termination, pay rate and disputes of all labour related matters. This prevents companies from offering any incentives to employees, or rejecting unqualified candidates. It gives no responsibility to firms in handing the public image of their company and threatens the possibility of effective customer service in the tourism industry. Furthermore, the fixed contracts for FDIs are set at 15 years by the government and require renewals if businesses are to sustain operations any longer. FDIs could become frustrated with the process of renewing licenses in Cuba, and ultimately withdraw from their operations or sell shares to prevent tedious efforts to stay.

Cuba’s tourism industry will continue to grow as it did 11.9% through 2016 from the same timeframe in 2015. While Canadians continue to be the primary tourists in Cuba, the United States has seen a tremendous increase since the start of direct flights from United States to Cuba. The expected revenue from the tourism industry in Cuba remains unanimously high, but no set projections have been calculated. There are currently 56 project opportunities in Cuba for foreign investment in tourism which include; hotels, building constructions, infrastructure development, hotel operators, and restaurants.  There remain endless opportunities in the tourism industry as Cuba is slowly transforming state laws for an increase in investment. While FDIs remain skeptical to invest in a centralized socialist economy, the rewards and growth perspectives remain attractive.