In Desperation: Foreign Investment in Trade, Under the Control of the Cuban State

The attempt to promote development in the country’s business to boost wholesale trade through foreign investment faces the same problem as always: what to trade. (Granma)

14ymedio bigger14ymedio, Elías Amor Bravo, Valencia (Spain), 16 August 2022 — No one was calmed by the appearance on State TV’s Roundtable show of Betsy Díaz Velázquez, Minister of Internal Trade, and Ana Teresita González Fraga, First Deputy Minister of Foreign Trade. The officials used their appearance to announce alleged changes in the role of foreign investment in domestic trade and thus try to solve the problems of shortages in the wholesale and retail trade that afflict Cubans.

Badly, things are going very badly in Cuba, such that there is a leap into the void like this. Nor do they believe most of the things they said, and thus they were unconvincing and with an argument bordering on the most absolute lack of credibility.

Why do we say this and not believe that these new measures will achieve the positive effects on the functioning of wholesale and retail trade, as well as foreign investment in Cuba?

For the same reason that the “63 measures” haven’t served to stimulate agricultural production. Once again, Cuban communists believe that the main problem of the economic model that governs the country can be fixed with ’sake of appearance’ patches, ignoring the structural reforms that must change, update and modernize it. Let them forget about it: a house is not built starting with the roof, but with solid and firm foundations. That’s what the two Castroite leaders didn’t talk about on state television.

Several aspects deserve attention, in addition to this superficial way of addressing a more structural problem. The measures announced are temporary, which makes it difficult to achieve any interrelationship between them, no matter how much the communist leaders say otherwise. In fact, they can only be seen independently and in isolation, and they arise in a global economic context that is by no means the most suitable to adopt for this type of problem.

The measures, in addition, seem to be made, preferably, for state enterprises; in particular, the elimination of the foreign exchange restrictions with which they operate. Has the regime already found a way out for the dollars it started buying on August 4 with the exchange rate instrument? This is bad, like killing flies with a cannon.

This circulation of foreign exchange from the private sector to State entities to overcome the problems of shortages in the domestic market of goods, highly demanded by the population and by non-state actors, is a reckless decision, which won’t achieve the objective, no matter how flexible customs procedures and operations become. The first thing that has to be guaranteed is a stable framework for these operations to actually be carried out, without the need for promotion by the State, and here we have one of the evils of the Cuban economy.

The communist leaders were cautious and recognized that “actions are insufficient to curb the complex economic situation, since shortages in the domestic market are maintained, and the expected impact on the development of wholesale trade hasn’t been achieved.” So, what is the point of straining the domestic economic scenario, more than it is, with measures in which no one has the slightest confidence? Who will assume responsibility when in a few months the new failure of these measures is seen?

The idea of transferring the alleged benefits derived from the participation of foreign investment in the development of trade in areas like the access to supply markets, attracting financing, equipment, administration methods or the use of innovative techniques for logistics management, should be based on a prior analysis of the intention of foreign investors to participate in this “business.”

They might be surprised, because it’s difficult for foreign capital to have any motivation to make this contribution. Will this objective be achieved through direct interference by the State? Let them say it, because then foreign investment will leave the country. It’s that simple.

The two ministers should know that the attempt to promote the development of business throughout the country to boost wholesale trade through foreign investment faces the same problem as always: what to trade, and what production of goods and services can be directed to these operations? In addition, doing it with joint ventures is no less complicated, since this entity is the least used by foreign capital in Cuba. Let them wonder why.

The idea that businesses with foreign investment are mainly destined for the sale of raw materials, inputs, equipment and other goods that boost national production, as well as the supply of some finished goods — for example: food, cleaning products or electricity installation systems with renewable energy sources — is part of that obsessive mania of Cuban communists to control and direct foreign capital, a model that hasn’t produced revenue since the adoption of Law 118.

That there are entities that can finance domestic producers who have the conditions to become suppliers, with a differentiated financial scheme applied to these entities, which guarantees the stability of the supply chain, including the authorization to make sales in freely convertible currency (MLC). This creates confusion between the different agents and lays the foundations for a principle of political discretion in decision-making. Not good.

It is also intended to authorize the modalities of foreign investment established in the country for the provision of goods and services, which have the conditions for this purpose, that can be sold in the wholesale trade segment, including forms of non-state management, non-governmental organizations, embassies, business representations and branches in Cuba. It’s a crazy decision, which has very little to do with economic rationality and which falls into this area of “every man for himself” and the Regime’s lack of credibility that we talked about at the beginning of this article. Imagine an embassy in Cuba selling sanitary napkins or toilet paper to small businesses.

Entangling trade with foreign investment through these measures “carries a very high responsibility so that they have the immediate result that the population expects,” Ms. Díaz Velázquez acknowledged.

On a theoretical level, the minister believes that sales in MLC will increase products available in pesos and, with this, it will be possible to counteract the increase in inflation and stabilize supply. The problem is that this cycle has been in operation for more than a year and has not yielded any results. So, what reasons are there to expect that it can be different now? None. The figures for the sector are the same. Nothing has changed and will not change, so any transformation is impossible.

Cuban trade, modern, competitive and efficient before 1959, has become a useless waste after 63 years of communist domination. It’s probably one of the most inoperative and unfair trading systems in the world, with an aging, underutilized and deteriorated infrastructure, and without incentives to improve supplies. There is a lot lost, because the communists eliminated intermediaries and commercial agents from the beginning. Recovering trade goes beyond putting patches on foreign investment.

The Regime’s obsession with prioritizing the State market and interfering in the businesses that may arise to boost national production, achieve productive chains and offer goods and services to the population, leads to the very disaster of measures that lack experience in other countries of the world. Far from unblocking operating conditions, this will make them more confusing by authorizing only certain foreign investments and prioritizing what has to be done based on political and discretionary decisions, the worst thing that can happen to an economy.

And in the midst of this national environment of widespread shortages suffered by Cubans, the leaders who participated in the Roundtable came up with the idea that it’s necessary to export however and as soon as possible. Export what? Apart from the fact that the State has a monopoly on foreign trade, which implies absolute control of this activity and the execution by State entities of export and import operations, which “has not been renounced nor will it be renounced,” as one of the communist leaders said, in case anyone had the slightest doubt, there are still “risks” from applying these measures, because of that obsessive mania of the Cuban communists with everything that has to do with economic freedoms.


Editor’s note: This article was originally published on the Cubaeconomía blog and is reproduced with the permission of its author.

Translated by Regina Anavy


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