Socialist Countries Open Door to Foreign Investors

After nearly a quarter-century of very limited involvement with multinational companies, the government of Cuba is cautiously moving forward with a plan to permit direct foreign investment in the form of joint ventures with state enterprises for the first time since the triumph of the Cuban revolution in 1959.

Discussions with many Cuban officials invoked in implementing the new law on "economic associations between Cuban and foreign entities" (enacted in February 1982) indicated that the new policy has limited objectives - principally to obtain much-needed foreign exchange. Moreover, foreign investment in Cuba will be limited to a few sectors of the economy, with special emphasis on tourism. But the new policy will not, notes Chairman Raul Leon of the Banco Nacional de Cuba, permit foreign investment to play a significant role in the overall Cuban economy.

The new willingness to accept some Western investment is part of Cuba's strategy for dealing with its severe foreign exchange shortage, which results from causes largely beyond the country's control. The main element in this crisis is the low price of sugar - still Cuba's dominant export - on world markets. Sugar now earns less than 6'/z cents a pound, compared to a high of 41 cents as recently as October, 1980. Each one-cent difference in the price represents a loss to Cuba of $60 million annually in export earnings.

Debt service, accounting for 60% of Cuba's hard-currency spending, is another problem. Western commercial banks aggravated the foreign exchange shortage by reducing Cuba's credit lines by 25% in the first half of 1982. This was far more than reductions for other developing countries during the same period, according to a report prepared for the Cuban government by the UN Conference on Trade and Development.

These credit cutbacks occurred even though, at the time, Cuba was not in arrears in its debt service payments to the banks. The fact that the banks' cuts occurred at the same time that the Reagan Administration was further tightening the U.S. economic blockade of Cuba by imposing stringent travel restrictions suggests that U.S. pressure may have been a factor in the banks' actions.

Cuba has since undertaken a renegotiatin of its commercial bank debt. But, with the outlook for sugar prices still gloomy, the foreign exchange shortage can be expected to continue. Hence, the government's willingness to explore joint venture possibilities with foreign companies.

Cuban authorities have focused the joint venture initiative on the tourist industry and on a list of some 8 factories for which foreign companies could provide raw materials, export markets or improved technology and management, all with the aim of increasing export-oriented production.

In tourism, the joint venture plans center on Cayo Largo, a small island off Cuba's southern coast, which has some of the Caribbean's best scuba diving sites. Tentative plans envision a complex of resort hotels with perhaps 2000 rooms. This compares to a total of 6750 rooms throughout Cuba (primarily in Havana and the traditional beach resort of Varadero) currently considered suitable for international tourists. Full development of Cayo Largo could provide upwards of $100 million annually in foreign exchange earnings.

The emphasis on development of the isolated Cayo Largo site, instead of joint venture hotels in Havana or other cities, reflects Cuba's awareness of the potential negative impact of tourism. Both Chairman Leon of the Banco Nacional and Jose Gorra, adviser to the National Tourism Institute, referred to the "social pollution" that can often accompany tourist development, and efforts are being made to contain this problem. Cuban workers at Cayo Largo resorts, for example, will not live there year-round, but will work a schedule of 20 days on and 10 days off, returning to their homes on the mainland. Gambling, the centerpiece of Cuban tourism before 1959, will not be permitted.

At present, Cuba's existing facilities for foreign visitors are almost always full. For Canadians, the country is by far the cheapest Caribbean resort destination. And, before the U.S. imposed a nearly complete travel ban last April (see MM, June 1982), some 40,000 U.S. tourists annually were visiting Cuba. The new resorts, for which Cuba is seeking foreign investment, are necessary if tourism earnings are to increase.

In addition to tourism, a number of light industries have been selected by Cuba's State Committee on Economic Collaboration as potential joint venture candidates. Generally, the factories involved were purchased from Japanese or European suppliers within the past 10 years and are currently operating at less than full capacity, as a result of shortages of imported raw materials or lack of export markets for the factories' products.

At a pharmaceutical plant outside Havana, for example, capacity is some 80 million penicillin capsules annually, but the domestic demand is only 10 million. A foreign partner is being sought to provide guaranteed markets for the remaining unused capacity.

Among other factories for which foreign investment is being sought are an automobile battery plant in Manzanillo, a cable and wire factory outside Havana, cereal enterprises in Santiago and Cardenas and a plant in Ciego de Avila for making construction materials from sugar cane waste.

Foreign investors in these industries will face relatively little risk. In general, they will not be asked to put up large investments, as the factories already exist. Instead, the foreign companies will be called on only to ensure supplies of raw materials or markets. It is unlikely, according to Dr. Jose Rodriguez of the Committee on Economic Collaboration, that total investment by any Western company would exceed $10 million. This low-risk approach, says Chairman Leon of the Banco Nacional, is a means by which Cuba can establish a "track record" with foreign companies, after 24 years of virtually no foreign involvement in the economy.

Because of the comprehensive system of social services built up since the 1959 revolution, and Cuba's policy of controlling prices of basic necessities (housing, for example, is made available at a cost equal to 6010 of a worker's salary, and all education and medical care is free), wage costs in the joint ventures will be low by world standards. Cuba's Chamber of Commerce, in charge of promoting the new law, promises that foreign investors will be able to obtain workers at salaries ranging from $110 a month for starting factory and office workers to a maximum of $400 a month for experienced technical and professional personnel.

In addition, Cuban authorities are prepared to guarantee supplies of domestic goods and services to the joint ventures, at prices which can be fixed for up to five years. Other incentives for potential joint venture participants include low taxes (a maximum rate of 30%, and the possibility of tax holidays or reductions in some cases), and virtually complete freedom for the foreign company to repatriate profits, with little or no direct control exercised by Cuban banking authorities.

Although no formal joint venture agreements have yet been signed (regulations implementing the new law were only issued in September, 1982), some 24 foreign companies are already registered in Cuba, primarily for trading operations, and a few have contracts with Cuban enterprises for last-stage processing (of textiles into garments, for example) of imported materials which are then re-exported. Cuba's low wage rates permit it to compete with such other "export platforms" as Taiwan, Hong Kong or the Philippines in these industries.

If the Cuban effort to attract foreign investment succeeds, U.S. companies may lose out on a potentially profitable situation. New U.S. Treasury regulations under the Reagan Administration prohibit the transfer of any U.S funds into Cuba.

During the Carter Administration, large groups of U.S. businessmen visited Cuba and began to generate pressure for lifting the economic blockade. Cuban officials still express interest in long-term possibilities for U.S. trade and even investment, but it is unlikely that much will happen while the Reagan Administration maintains its restrictive policies.

Stephen Zorn is Vice President of Tanzer Natural Resources Associates, Inc., in New York City, and writes on energy and resource issues. He visited Cuba in mid-January.

II. Nicaragua Debates New Rules for Foreign Companies

In a bid to attract investment from multinational corporations, the Nicaraguan government is discussing liberalization of its foreign investment law. The proposed law is expected to be acted upon by the Council of State before summer.

Exact details of the law have not been made public. But last December the Nicaraguan Minister of Finance, Joaquin Cuadra, told the New York Times that the new regulations will allow 100076 foreign ownership of Nicaraguan operations, and give investors the right to repatriate their profits. Foreign companies, said Cuadro, will also be taxed at the same rate as Nicaraguan businesses, a flat rate of 40% of profits.

Under the Somoza dictatorship, foreign investment in Nicaragua was not extensive; the highest level reached was $300 million. But since the Sandinista-led revolution in 1979, foreign investment has declined. Last year, for example, Standard Fruit, a division of Castle and Cooke, announced that it was pulling out the country and would no longer market Nicaragua's bananas - as it had done exclusively for the past 12 years (see p. 4 and MM, November 1982).

The Nicaraguan government has also come under sharp attack from the Reagan Administration. In recent months the U.S. has assisted in efforts to destabilize Nicaragua by giving aid to forces opposed to the government and has held maneuvers with the Honduran army on the Honduras-Nicaragua border.

A spokesperson at the Nicaraguan embassy in Washington told Multinational Monitor that the new investment ;ode was "not at all" a response to pressure from the Reagan Administration, but rather a "very old project" of the revolution.

A mixed economy

Since coming to power, the Sandinistas have been trying to get their underdeveloped country on its economic feet. Their strategy has been to encourage a mixed economy of privately owned farms, factories and stores together with cooperatives and state ownership of some farms and major industries. But the obstacles have been great: war damage, the pillaging of the national treasury by Somoza and his allies, disinvestment by landowners and industrialists, continuing attacks by the "contras" (counterrevolutionaries), a depressed world market for Nicaragua's primary exports, the collapse of the Central American Common Market, and natural disasters.

According to preliminary figures released by the Nicaraguan embassy, Nicaragua's economy contracted by 2.5% in 1982 after two years of solid growth. Although a disappointment to the government, this was the best economic performance in Central America. In 1982, Costa Rica's economy dropped by 5.6%, El Salvador's by 10% and Guatemala's by 3%.

In December 1982, the Nicaraguan government moved on several fronts to attack its continuing economic problems. Minister of Finance Cuadro travelled to New York to make a plea for increased investment in the country, and made the first public presentation of the new investment law before the Council on Foreign Relations.

That same month, the government obtained a $25 million short term loan from a group of Western bankers led by the Bank of America-a significant event since Nicaragua has had trouble getting credit from foreign banks and multilateral lending institutions. The credits enabled Nicaragua to meet a$40 million interest payment on the $580 million commercial portion of the country's $2.5 billion external debt.

In another expression of its willingness to work with American companies, the Nicaraguan government has moved to settle a dispute with the Neptune Mining Co. of New York, 52% owned by ASARCO (American Smelting and Mining Co.), over issues raised by the 1979 nationalization of the company's gold mine. Neptune and the Nicaraguan government agreed in December to seek arbitration on tax and accounting questions resulting from the action; Nicaragua also agreed to pay Neptune $3.7 million, plus interest, over a six year period for the minerals seized during the nationalization.

The timing of the agreement was "fortunate," Justice Minister Carlos Arguello told Business Week. "It should show U.S. businessmen that we want to deal with them in a fair way, in a responsible manner, to our mutual benefit."

Foreign capital for a strained economy

"The (foreign investment) law is not a favor that we are doing for the multinationals to allow them to set the roots of their oppressive system in our country," Ruiz Caldera of the International Directorate of the Sandinista Front (FSLN) told Multinational Monitor in an interview in Managua last December. Caldera argued that the law will strengthen the Sandinistas' hand in dealing with multinationals and "will only be beneficial for the people." Because of "the way we will apply this law," he said, "it will strengthen Nicaragua's currency, broaden our commerce throughout the world, and combat unemployment."

Many Nicaraguans interviewed about the law felt it would ease some of the problems of the country's strained economy. "We're in the birth pangs of a new economy and we need lots of things, material resources, to get our economy going," said Jose Marie, Jinotega's Agricultural Workers' Association representative. Mario Epelman, General Director of the Ministry of Labor's Divsion of Occupational Safety and Health, stressed that he supported an increased presence of multinationals as long as "they follow the rules. I would like the plants here to have the same safety and health conditions as they have in the U.S." But he added, "I know that multinationals go to countries precisely where there are no regulations."

The proposed law has generally been welcomed by foreign businesses already operating in Nicaragua. A commercial attache at the U.S. Embassy said that multinationals "favor such a law so they'll know what the rules of the game are." Ray Genie, general manager of Electroquimica Pennwalt (40% owned by Pennwalt of Philadelphia) agreed: "Any kind of regularization of procedures would be welcomed. It will be a way of knowing exactly what is expected of us."

The prospect of increased foreign investment in Nicaragua has caused some uneasiness. "Some consider it a doubleedged sword," said Caldera of the FSLN, with "both advantages and disadvantages." A commercial aide at the U.S. Embassy said that "any law favorable to multinationals would have to go against the goals of the revolution."

One Nicaraguan official told Multinational Monitor that the country would be better off without multinationals. Sylvan Howard, tourist development official for Zelaya Province on the Atlantic Coast, pointed to the history of foreign lumber interests in Puerto Cabezas to make his case. "They stayed in Nicaragua for 30 years. And when they left, they left people who were underfed, barefoot, without clothes. Streets were not paved. And they took out millions and millions of dollars but left nothing in return."

Howard would prefer that companies like Hilton and Sheraton stay home in order to maintain the area's "bucolic character and not create a highly urbanized development ... I really believe that with local people and local resources it will be better for Nicaragua."

The prospects for investment

Despite the new code, the prospects for investment in Nicaragua are unclear. "Most businesses would just as soon invest in other countries," a Central American officer for the Commerce Department told the Monitor. Nicaragua, he added, "is less appealing than other markets because it doesn't have a healthy private sector." The official doubted that the new investment laws would change the situation. "You don't know until you see how the government implements these changes," he said.

Some observers have stressed that political uncertainties in Nicaragua and throughout Central America may hinder investors from taking advantage of the new law. "As long as a State of Emergency prevails, it is difficult to say whether multinationals will invest," said an official with Nicaragua's International Fund for Reconstruction.

But according to the Nicaraguan Embassy, several U.S. businesses have expressed interest in Nicaragua in recent months. Hope Consultants, Inc., a shipbuilding and oil firm based in Louisiana, visited Managua in January. "The American entrepreneurs stated their interest in investing some $20 million," possibly in shipyards, electric power plants or worker training, the embassy reported. In a recent interview with Latin America Regional Reports, Hope president Richard Miles said his company's investments were contingent on the new law. "We shall wait and see what the foreign investment law says before committing ourselves," he said.

But a Nicaraguan Embassy spokesperson stressed the positive implications of Hope Consultants' visit. "If this happens in the situation of the worst propaganda from the Reagan Administration and attacks from the contras, that means something," she said, adding, "Any investments would be very welcome."

David Kowalewski teaches international relations at Siena College in New York. He visited Nicaragua in December 1982.