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Example research essay topic: Foreign Direct Investment Wall Street Journal - 4,145 words

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Cuba: On the Road to Reform by Timothy Ashby Timothy Ashby served as Director of the Office of Mexico and the Caribbean Basin of the US Department of Commerce. He is now an independent consultant based in Washington. Today Cuba is an anachronism, a small island of socialism in a hemisphere that has largely abandoned state-dominated economics, adopting market-based democracy as its path to prosperity, and is beginning to enjoy the fruits of investment and growth stemming from this transition. Still, Cuba remains one of the last bastions of orthodox Marxism in the world, led by Fidel Castro, an aging caudillo who in the early 1960 s shared the world stage with historic figures, including John F. Kennedy and Nikita Khrushchev.

In the 1990 s a new Cuba is now stirring beneath the thinning veneer of dogmatic socialism, one stimulated by market forces that are changing both the economy and the politics of this largest of Caribbean islands. The end of massive subsidies and loans from the former Soviet Union and its communist allies has placed the Cuban government under pressure to reform quickly enough to avert civil strife yet preserve the most cherished gains of the socialist revolution. The Castro regime has been forced to undertake market-based reforms in attempting to preserve its absolute control over political power. While the reform measures have achieved some degree of economic stabilization, recent attempts to deepen the reforms have stalled, implying an uncertain outlook as to how quickly economic and political change will unfold in Cuba. Economic Devastation With the fall of the Berlin Wall, the CMEA dissolved and the formerly socialist countries have had to penetrate world markets to earn hard currency. The loss of subsidized imports from the socialist bloc, as well as major markets for its exports, has devastated the Cuban economy.

Forced to use hard currency to pay for imports, Cuba's foreign exchange reserves are being rapidly depleted, particularly since it must now pay world-market prices for almost all imports of crude oil. Since 1989 overall imports have plummeted more than 60 %, representing a contraction in GDP of over 25 %. Most of the lost imports have been essential raw and intermediate materials, thereby severely depressing industrial production. Excess capacity in all sectors except agriculture and tourism is now estimated by local experts at more than 80 %. Because of the foreign exchange shortage, Cuba has been getting further into hock.

Although official debt statistics have not been published since 1990, Cuba's external debt was estimated at $ 32 billion in 1991 and now hovers around the $ 35 billion mark. Worse yet, most of the debt is poorly structured, creating a tremendous drain on its limited resources and already depleted foreign exchange coffers. The loss of most of the heavily subsidized oil from the NIS area, for example, has created severe energy shortages, with the government forced to import bicycles from China as a substitute for public transportation. Gasoline is very costly and out of reach of most Cubans, while scheduled and unscheduled power cuts are now common throughout the island. (Brown-outs continue to damage already antiquated industrial machinery. ) Shortages of spare parts and fuel have also affected the still pivotal sugar industry.

For example, at a meeting of the Pinar del Rio Ox-Team Drivers in November 1993, it was reported that 2, 800 pieces of Ministry of Agriculture equipment had been replaced by animal-powered machinery. Some 80 % of the provinces agricultural output was harvested using farm animals. The government reports some bright spots in this generally bleak outlook. One is a pickup in oil exploration and production-to 1. 1 million tons last year vs. 800, 000 in 1992. The other is the recent decision of the NIS to sell Cuba additional oil, but still well above the subsidized prices of the pre-Gorbachev period. Moreover, Cuba is far from getting the foreign investment needed to boost its oil production enough to become self-sufficient in the short to medium term.

The island does continue to receive needed crude from Mexico and Venezuela in line with its bilateral framework accords with these two countries. However, they too are charging Cuba world market prices, which are now on the upturn. Taking its Toll As might be expected, Cuba's economic crisis is taking its toll on Cuban citizens. Food rationing has reduced many people to bare subsistence, and malnutrition is now a problem. Medical supplies are scarce. Cuba's vaunted social safety net is badly torn; redundant state workers are paid about half of their wages for a maximum of three months, then told to seek jobs in the countryside.

Unemployment and underemployment in many urban and industrial areas exceed 50 % even by official estimates. Exports of manpower to Central America and as far as Bolivia and Angola once served as an important safety valve for the Cuban regime. But such foreign technical and military missions have largely ceased with the end of longstanding civil conflicts in those nations. As a result of Cuba's economic difficulties, the black market is now larger than the legal, state-dominated economy. The Cuban Center for the Study of the Americas estimates that in the 1990 - 93 period underground economic activity grew five-fold to over 10 billion pesos. The legalization of dollar transactions in July 1993 was ample recognition of the US dollar as the medium of exchange in a large and growing parallel economy.

Accepting Economic Reality The dollar ization policy is but one market-oriented measure that reflects the harsh realities confronting Cuban policymakers. Aware that its survival is threatened by the economy's disastrous state, the Cuban government has replaced the omnipresent political slogan Socialism or Death with signs proclaiming The Realism of Survival. The authorities also must devise ways of earning foreign exchange, even though such initiatives increasingly conflict with Castro's most cherished socialist ideals. One key factor in Cuba's movement toward a market-based system is the emergence of young technocrats who have replaced the aging veterans of Cuba's revolution in key foreign and economic policy posts. During the past two years many of the positions in the politburo and half of the cabinet have been filled by people under age 45, such as Foreign Minister Roberto Robaina Go lez, 38, a former Communist Youth leader who is now a leading reformer. The younger officials, many of whom were educated in the former Soviet bloc and have retained ties with their counterparts in the new, market-based democracies of Central and Eastern Europe, know how free economies work.

While still broadly committed to Cuban socialism, they have openly admitted to foreign journalists: We have to play by the rules of the capitalist game to survive. (Time, June 23, 1993) While schisms are developing between reformist officials advocating aperture (the Cuban version of perestroika) and doctrinaire communists, Fidel Castro remains el less m xml and therefore the ultimate policymaker. Even Castro, however, feels the pressure. Out of a desire to preserve both the political status quo and as many essential social services as possible, Castro has sanctioned economic reforms that would have been condemned as counterrevolutionary thirty years ago. Seeds of Reform Although the current crisis has accelerated the trend, market-oriented reforms began in the early 1980 s when the Cuban military introduced production incentives for enterprises it controlled. For example, Gaviota operates as a de facto holding company for the Cuban militarys tourism enterprises, including the Morro-Cabana military historic park, sports and health tourist projects and eco-tourism. In fact, the incentives and new management techniques have proven so successful that these industries have been singled out as models of efficiency-even the Soviet defense ministry studied them.

Back in February 1982 the Cuban government issued Decree 50 establishing the legal basis for joint ventures with foreigners to operate in Cuban territory. Considering this was still the pre-glasnost era, this decree qualifies as one of the most progressive foreign investment laws of any CMEA member at that time. Decree 50 gave joint ventures full autonomy, as well as license to carry out all operations in hard currency, introduce modern management techniques (including incentives), and fire undisciplined or unproductive workers. The new joint enterprises were also given custom duties and tax exemptions (except for social security contributions); allowed to repatriate profits freely; and obtain hard currency financing from Cuban banks at prevailing international rates. A growing number of Cubans has acquired technical skills and modern management techniques as they have been exposed to market principles and foreign investors. Jobs at joint ventures are in such demand that the Cuban government has set a five-year limit on employment in such enterprises so others may also have the chance to work in them.

The managers of state-owned enterprises still are often better-educated and more entrepreneurial than their counterparts in the former Soviet bloc. Indeed, the entrepreneurial talents of Cubans who have emigrated to the United States are legendary. Thus, as an economist in a state-owned enterprise has commented to a Wall Street Journal writer, the resurrection of capitalism in Cuba is inevitable. We are simply looking for ways to do it while keeping the social cost down. (Wall Street Journal, February 12, 1993) Moving Toward Private Enterprise The dollar ization decree of July 1993 clearly signified a major step in the unraveling of socialist doctrine in Cuba. Instead of being able to use dollars only in the underground economy, Cubans can now purchase goods at special dollar shops previously reserved for tourists and diplomats. Thus, the measure not only reflected economic reality, but served as an attempt to stave off political unrest by giving people greater access to essential but increasingly scarce products.

Along the same lines, Decree 141, issued in September 1993, allows Cubans to be self-employed in 135 types of goods and services. This measure has stimulated an increase in trades catering to the average citizen, including private mini-vans and taxis and over a hundred private restaurants established in once private homes. According to Prensa Latina, by February of this year 142, 000 Cubans reportedly had received self-employment licenses, while another 15, 200 applications were pending that month. However, like other economic reforms directed at ordinary Cubans rather than foreigners, Decree 141 is hobbled by official restrictions. Any professional (i. e.

a person with a university degree) cant be self-employed. Applicants for self-employment licenses must first pass a background check by the Ministry of the Interior. In December 1993 Radio Progreso reported that hard-liners on the Havana city council issued regulations to stop private trades and services from getting out of control. Some new restaurants were forced to close because new city regulations barred them from selling fish, meat or alcoholic beverages.

Private taxis were also barred from tourist districts, and providers of other services were restricted to limited areas. Nonetheless, despite these regulatory impediments, private business activity is flourishing and law enforcement officials are reportedly inclined to turn a blind eye to infringements of Decree 141. Reforming Agriculture Additional decrees on self-employment, legalization of the US dollar and revamping of the state farm system were enacted during an acrimonious session of the National Assembly in December 1993. Cuban officials regard the agricultural reforms as particularly radical. In order to boost increasingly scarce food items, most of Cuba's state-owned farms were turned into self-financed, semi-autonomous cooperatives, with workers able to earn bonuses for exceeding their quotas as an incentive for increasing food production. (Cooperatives can also fire inefficient workers and cut back excess personnel. ) However, the once-popular experiment with private individual peasant farms wasnt revived despite continued food shortages throughout. More reforms to reduce the states huge budget deficit of 5. 2 billion pesos and curtail continuous use of the money printing presses were debated but postponed for enactment until later due to government concerns about popular discontent.

The proposed measures include currency reform, elimination of subsidies to state enterprises, layoffs of public workers and additional price increases on selected goods and services (e. g. water). A higher personal income tax would be levied and collected from all Cubans, unlike today when only a few actually pay taxes. Attracting Foreign Investment The Cuban government generally favors international investment that generates or conserves badly-needed foreign exchange.

Investments in tourism, the oil industry, pharmaceuticals, medical equipment and computer software receive priority. Reflecting both its more liberal economic climate and the potential of its market, foreign direct investment since January 1992 is estimated at over $ 500 million, with nearly 90 % going into the tourism sector. Some 20 % of Cuba's GDP is now generated by about 100 major joint venture companies established since 1990; 21 are in the tourism sector. By the end of 1993, 496 foreign firms had registered in Cuba and a further 85 were in the process of registering. In mid-June, a large Mexican group agreed to purchase and run Cuba's ailing phone company. As happens elsewhere, the actual capital inflows may, of course, be lower than the amount registered because of delays in getting the projects from the blueprint to the actual construction stage.

Joint Ventures are In The Cubans are giving broad interpretation to Decree 50 and other laws and regulations governing foreign investment. Majority foreign ownership is now allowed in some sectors, and 130 industries are open to foreign investor participation. For oil exploration, the maximum allowable foreign shareholding is 50 %; the same holds true for debt / equity conversions. There are no restrictions on repatriation of profits or dividends, and profits from tourism and related ventures enjoy a ten-year tax holiday. A bilateral investment guarantee treaty has been signed with the Italian government and similar treaties are being negotiated with Spain and the Netherlands. Although foreigners are not allowed to own land, they may lease most property for up to 99 years.

The Financial Times has described Cuba's financial services sector as ripe for take-off. Due to its need for credit, trade guarantees, import and export financing, credit card operations and other financial services, Cuba is actively courting foreign banks and major accounting firms to establish joint ventures with state-owned firms. Developing Tourism Because of its foreign exchange potential, the tourism industry is an important investment priority. Capacity in this sector is being expanded rapidly in anticipation of the arrival of many American tourists-and Cuban exiles-after the lifting of the US trade embargo.

Most new hotels are joint ventures with foreign investors and several are located in special enclaves out of bounds to most Cubans. For example, the Spanish firm Guitar, which leased the former Havana Hilton, has formed a joint venture to build 16, 000 hotel rooms at the Cayo Largo beach resort outside Havana. Cuba's average weekly wage of $ 28 for tourism workers is much lower than in the English-speaking Caribbean, and some 30 % less than the new Mexican minimum wage. Cuba's tourism development planning has been commended for its strict monitoring of the environment, and international marketing by the state tourism agency, Cubanacan, is increasingly sophisticated. Gambling on Cuban soil has been illegal since the revolution, but last December a new Cuban-Italian joint venture began operating one-day casino cruises from Havana and Santiago since gambling is allowed in international waters.

Tourists are heeding the welcoming call. According to government figures, gross revenues from tourism jumped to approximately $ 700 million last year, while the number of visitors rose to more than 700, 000 from 341, 000 just three years before. More may be on the way, thanks to improved economic conditions in many parts of the world from which Cuba draws its tourists. Cubanacan just launched a major European marketing campaign, including full-page color ads in the recent Sunday Times magazine and offering surprisingly sophisticated promotional literature. Barriers to Business Both the new generation of Cuban managers and foreign businessmen complain that the sprawling bureaucracy still lacks the pragmatism and openness shown by a number of senior officials.

Without access to cabinet ministers and other high level administrators, investors can spend months trying to get a venture started. In addition, since highly centralized planning programs were eliminated in 1991, theres been a lot of improvisation by many managers of state enterprises. Given the new operating environment, two kinds of state-owned firms have emerged. Autonomous enterprises-which generally consist of joint-ventures with foreign investors, military-owned firms and some enterprises in other sectors, such as fishing and pharmaceuticals-are run almost as mini-capitalist enclaves.

They can obtain necessary approvals and licenses and enjoy a significant amount of decisionmaking freedom. The managers of other state-owned firms, in contrast, still seem to operate as though they were in the former command environment, refraining from making decisions or taking risks while they await orders that never arrive. Thus, for a private sector to emerge, the managers of these firms must adapt to the new environment, just as their counterparts in former communist countries are also trying to do-with mixed results. (See page 19 on how Hungary is responding to post-cold-war realities. ) Although the Cuban government openly recognizes the need for modern training and educational programs, it has been slow in implementing them due to a lack of financial resources and indecisiveness brought on by inherent conflicts with the countrys de jure communist system. Last November Castro criticized the managerial incompetence of government-run tourist establishments and praised the profit-oriented efficiency of the hotels run by foreign capitalists.

In the same speech, however, the Cuban leader reaffirmed that Cuba is and will continue to be a socialist state. (Speech to the Cuban Communist Party, November 7, 1993, as reported by Reuters. ) Prospects for Political Change In effect, Castro embodies the contradictions of modern Cuba. While the Cuban leader is one of history's survivors and is essentially a pragmatist, his acquiescence to the reforms advocated by the younger generation of government and party officials has been grudging, done out of necessity rather than conviction. Despite the sporadic, crisis-driven transition to a market economy, positive structural changes are being made. The stealthy, bit-by-bit character of Cuba's transition to a market-driven economy makes a look into the future a hazardous prospect at best. The outlook for change in the political system is not nearly as encouraging. The Cuban Communist Party remains adamantly opposed to a multi-party political system.

Castro also rejects discussion of possible legalization of other parties. He has candidly admitted that such a move would merely divide the people into factions and ensure the Communist Partys defeat. While anti-government protests occurred during 1993, they were generally small and sporadic. No organized political opposition exists in Cuba, mainly because the majority of Cubans must give priority to finding the basic necessities of life rather than to a political situation many feel powerless to affect.

Fear of the state security apparatus remains widespread and dissidents are still imprisoned regularly. Despite their determination to maintain a vise grip on political power, Cuban officials are aware that the effort to attract international investment and foreign exchange is a two-edged sword. Indeed, greater contacts with the outside world have resulted in a more vocal Cuban populace, with an increasing number expressing a renewed interest in political freedom. This is precisely the argument advanced by outside observers who support ending the US trade embargo against Cuba.

Moreover, the more pragmatic government officials-perhaps even Castro himself-are beginning to accept the idea of life after communism. In fact, Cuban academic institutions, government ministries and the DGI intelligence agency have been ordered to prepare studies on the economic transition in Eastern Europe and Asia. Some Cuban officials regard Spain, Cuba's major source of foreign direct investment and most important ally in the European Union (EU), as an attractive model for a peaceful transition to a democratic, social market system. Cuba has also unofficially approached England and the EU for financial assistance in restructuring its economy. While the EU provided $ 12 million in aid to Cuba during 1993 and is officially opposed to the US embargo, it has made clear that future economic cooperation with Cuba is contingent on democratic pluralism and respect for human rights. Yeltsin Favors Transition Ironically, even Russians returning to Cuba on business or on technical advisory missions may push Castro toward democracy.

Members of the Yeltsin government, as well as Russian entrepreneurs, have retained fraternal sympathies for Cuba and hope to facilitate a peaceful transition to democracy and a market economy. In January 1994 Moscow and Havana concluded a new sugar-for-oil barter agreement (although much less favorable than previous ones). This followed on the heels of a Russian-Cuban investment protection protocol, and the Yeltsin governments pledge of a US$ 350 million credit to complete power generation and mining projects begun under the Gorbachev administration. Despite the Castro governments vociferous condemnation of international financial institutions, last year it quietly invited a two-man team from the International Monetary Fund (IMF) to Havana to survey the economy and brief senior officials on the transition experiences of Eastern Europe. A summary of the IMF mission report warned the Cubans that time is running out and urged rapid and sweeping reforms. It stated that the Cuban government has decided that maintaining its inefficient, centrally-planned economy would inevitably rupture the social fabric, with all the remaining accomplishments of Cuba's political and social model disappearing in the wreckage.

What the Future Holds Fidel Castro and other aged revolutionaries are understandably reluctant to open the floodgates of change, which will either sweep them into retirement or subject them to a less benign fate. The Cuban people, meanwhile, are desperate for an improvement in their economic circumstances but are also apprehensive about some of the reforms the government has adopted. According to recent news accounts, the economy is showing some signs of stabilizing as the reform measures take hold. On the other hand, a growing gap has emerged between the small percentage of Cubans with access to dollars (obtained through tourism, joint ventures, or foreign sources) and those without it. The rise of a new privileged class has caused popular resentment and could fan the flames of political discontent should this group continue to grow. Members of the exile community have predicted that Cuba's economic crisis will result in an Armageddon for the Castro regime.

However, a violent revolution is not a high probability, as the Cuban government recognizes that structural change is vital to its own survival. While the government reportedly is divided on the pace and scope of economic changes, younger reformers like Roberto Robaina and Carlos Lage will probably prevail. Despite Fidel Castro's outdated communist rhetoric (which many believe to be largely the posturing of a shrewd politician), he quietly supports Robaina and his colleagues. Castro's popularity among Cubans is now largely abstract, based on nostalgia rather than a belief he can fulfill all the long-awaited promises made 35 years ago. In what may be his tacit recognition of impending change, Castro has admitted he is tired, the Cuban government is opening to new, younger leaders, and he would happily leave power as soon as the people or the Communist Party asked him to. (Paris Match, November 16, 1993. ) The Cuban Economy: Before and After the Revolution Before Fidel Castro took power on January 1, 1959, Cuba ranked third in per capita income among Latin American nations, behind Argentina and Venezuela. The islands economy was agriculturally based, with sugar, tobacco and citrus the principal crops.

Before Castro's takeover, the United States was Cuba's dominant trading partner, accounting for 67 % of Cuban exports and 70 % of the islands imports. Tourism was an important source of foreign exchange, with approximately 230, 000 foreign visitors in 1958 and 102 scheduled flights per week just between Miami and Havana. Baseball was the national sport, and everything popular sported a US label. After Castro's takeover and the subsequent US trade embargo, Cuba had to turn to its socialist allies. Between 1960 and 1990 the island received economic assistance totaling approximately $ 45 billion from the former Soviet Union and its allies (including military aid. ) In 1972, Cuba became a member of the former Soviet blocs Council on Mutual Economic Assistance (CMEA) and underwent major structural changes to adapt its trade and industry to the new relationship.

By 1987 CMEA countries accounted for over 85 % of Cuban trade despite new bilateral accords signed with many countries including Colombia, Mexico, Spain and Venezuela. Although Cuba's revolutionary leaders had intended to pursue a policy of economic diversification, they quickly had to abandon this approach. Instead, the government emphasized increased sugar production to garner essential foreign exchange earnings and Soviet subsidies. Sugar products represented 80 % of Cuba's exports between 1920 and 1959 and amounted to 82 % of total exports by 1986. Some 78 % of Cuba's sugar production went to the former Soviet Union in barter trade with one percent kept for the domestic market and the remainder sold for hard currency on the world market.


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