Cuba – Cautious Approach to Reform

In March 2014, the 612-member National Assembly approved an overhaul of the 1995 foreign investment law, a key step forward in the program of economic liberalization initiated by President Raúl Castro as part of a strategy for laying the foundation for a smooth transfer of political control to a younger generation of leaders from the PCC in 2018. The early indications are that the investment reforms will not by themselves be enough to convince private firms to take the plunge in Cuba. While some prominent companies are in negotiations to set up operations on the island—various media reports have mentioned Unilever (consumer goods), Pernod Ricard (beverages), and BrasCuba (tobacco)—there are no signs of a surge in interest among multinational corporations.
That is not surprising, as the recent reforms do not address some of the key deterrents to investment. Cuba’s infrastructure is woefully inadequate, and the government has not implemented wage policies that would facilitate the expansion of the private-sector labor pool. Moreover, while the opening of previously closed sectors to private participation is a welcome development, much work needs to be done in the area of legal protections, particularly with regard to intellectual property rights and the institutional framework for arbitration of disputes. However, President Castro confirmed in July that political considerations, rather than economic results, will determine the pace of reform.
The government’s cautious approach to reforms reflects the priority the PCC leadership attaches to ensuring that economic liberalization does not produce conditions that undermine the party’s political authority. However, the underwhelming performance of the economy suggests that the government’s go-slow approach might actually be counterproductive in that regard.
The government has cut its annual growth forecast to just 1.4%, and the available data suggests that the a further downward revision is probably justified, and the possibility particularly given conditions in Venezuela that point to a clear risk of an abrupt cessation of financial support from Caracas.