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AUTHOR:	MARIA C. WERLAU
TITLE:	Foreign Investment in Cuba: THE LIMITS OF COMMERCIAL ENGAGEMENT
SOURCE:	World Affairs (Washington, D.C.) v160 p51-69 Fall '97

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    With the demise of the former Soviet Communist bloc, Cuba suffered the loss of massive Soviet aid. This loss and the termination of traditional trade partnerships with the Soviet bloc had devastating effects on the Cuban economy after 1989. To foster a recovery, the leadership opened the door to selected aspects of capitalism. Although its overall adoption of market-oriented liberalization has been erratic and unenthusiastic, one consistent and visible aspect of the reform process has been the regime's eagerness to lure foreign investment. Capitalism had been virtually eradicated and bitterly vilified since Castro declared Cuba a Marxist-Leninist republic in 1961. Hence, the reforms, particularly the opening to foreign capital, have led to claims abroad that engagement--namely, commercial engagement--is the policy instrument that will lead to widespread economic and political reform and the eventual breakdown of Castro's regime. Founded on the premise that Communist rule will not be able to withstand the corrosive practices of liberal capitalism, engagement has become a fundamental element of the foreign policy of most countries toward Cuba.
    The importance of U.S. policy toward Cuba is widely recognized given the geographic proximity and historic closeness of their relations. Yet, since the early years of the Castro government that policy has been founded essentially on political isolation and a comprehensive economic embargo that precludes business activities in Cuba. The Clinton administration has been particularly committed to encouraging a distinctive policy mechanism--which might be described as "focused engagement"--aimed at supporting the emergence of a civil society in Cuba.(FN1) Rumors of a coming dissension with Cuba abounded until February 1996, when President Clinton supported a toughening of policy and the codification of the embargo through the Cuban Liberty and Solidarity Act, known as the Helms-Burton law. Passed with an ample congressional majority, this law was part of the chosen response for Cuba's violent repression of an incipient, organized, peaceful opposition and the shooting down of two civilian aircraft of a Miami-based organization. Although "focused engagement" aspects of U.S. policy remain fundamentally unaltered, the Helms-Burton law has closed the door to U.S. business with Cuba until a transition to democracy is under way there or further legislation dictates a change in policy. Helms-Burton, however, has elicited heated debate, underscoring the value of analyzing engagement as a policy prescription.
    This article is based on a much broader paper(FN2) and explores the reform-generating capabilities of foreign investment as an instrument of engagement in Cuba. Its emerging conclusion is that two primary factors inhibit its workability as an vehicle of reform and render the argument for commercial engagement fundamentally insupportable. First, the island's poor business prospects limit opportunities to attract a level of foreign investment that could affect the economy and society in a meaningful way. Second, Cuba's peculiar mode of foreign investment has been designed to secure regime survival by gaining access to foreign capital while suppressing the impact of its socioeconomic and political mechanisms. As a result, the most important reform-generating attributes of foreign investment are restrained while its detrimental side effects mostly appear to hinder the eventual establishment of a stable free market democracy.

CUBA'S DRIVE TO ATTRACT FOREIGN INVESTMENT

SELLING CUBA
    In the early 1990s, Cuba passed several constitutional and legal amendments to entice foreign investors into partnerships with state enterprises. Since then it has signed preferential trade and investment promotion and protection agreements with a number of countries, as visits to the island by foreign businessmen and trade missions have abounded. The U.S. business community has also shown interest in scouting Cuba's potential; according to The Economist, between 1994 and 1996 about 1,500 representatives of United States firms made "fact-finding" trips, often at the invitation of the Cuban government.(FN3) The drive to attract investment has also generated ample media attention; the thrust of reports in the United States has been that business opportunities are being missed while others are eagerly gaining a foothold in a new market, benefiting from the absence of U.S. competitors.
    Projections of Cuba's actual possibilities are widely divergent. According to estimates, a post-Communist/free market Cuba will have investment needs of over $14 billion. Yet, given the island's paltry economic performance, most claims of business opportunities seem excessively optimistic, lack serious data, and presume profound changes that have not occurred--namely, structural economic reform and the end of the U.S. embargo. In sum, analysts concur that Cuba must be reconstructed and desperately needs just about everything--infrastructure, agricultural machinery, food, medicine, consumer goods, and so forth. The question no one can answer is how Cuba will generate the means to make the required investments feasible. Hence, Cuba's purported potential for business require serious examination.

THE RESULTS
    Although reports coming from Cuba have pervasive discrepancies, some investors have undeniably been lured to Cuba, many with apparently profitable results. Companies from Spain, Canada, Mexico, France, Israel, and many other countries have formed joint ventures and signed economic association agreements with the Cuban government, with a typical participation of up to 49 percent.(FN4) In late 1996, Cuban ministers reported 260 registered joint ventures from 43 countries, present in 34 economic sectors (28 in mining, 25 in petroleum, 56 in the general industrial sector, and 34 in tourism). Despite low overall revenues from joint ventures (a mere US$114 million was reported by Cuba for 1995), some investors have apparently reaped generous profits. In 1996, Canada's mining company Sherritt, possibly the island's most visible investment, earned a return of 20 percent (US$30 million on sales of $147 million) from its half of a mining operation in Moa Bay.
    It is impossible to arrive at precise figures for overall materialized or direct foreign investment in Cuba. This data appear to be clouded by smokescreens and manipulated to fit agendas. The numbers frequently cited by academics and in the media are provided by Cuban government officials in speeches and interviews. Contradictions abound, reports fail to provide numbers on direct foreign investment, and a distinction is not made between joint ventures involving capital and cooperation agreements. Perhaps the most telling figures are those provided by the New York-based U.S.-Cuba Trade and Economic Council, which receives the official cooperation of the Cuban government.(FN5) Its updated table on foreign investment to August 1996 shows $5.3 billion "announced" and $751.9 million "committed/delivered" (providing no explanation for the terminology). It should be noted, however, that the council has given contradicting and vague reports in the past.
    The tourist sector is perhaps the most visible aspect of Cuba's push to attract foreign capital--in a growing number of tourist visits each year and apparently also in terms of investment. Since 1990, the number of visitors to Cuba has increased 54 percent (to 745 million in 1995), with earnings rising 75 percent (to US$1 billion). Nevertheless, exultant reports are often subsequently tempered by reality. Conflicting and confusing information on investment in tourism is also common. Despite accounts of numerous hotel joint ventures--particularly with Spaniards and Canadians--data on actual capital inflow, i.e., direct foreign investment, are unavailable. Allegedly, joint ventures in hotels tend to be management contracts in which the foreign partner will put in management and know-how, but hold back the capital. Plus, the recent codification of the U.S. embargo in the Helms-Burton law has dampened expectations that it would be lifted soon, opening Cuba to the U.S. tourist market. The Cuban government, however, claims that more growth is expected in tourism investments.
    Cuba's accounting practices present serious problems for analysts. Its reporting of foreign investment and other national accounts--including GDP--does not follow the standards of most countries. The discrepancy in foreign investment figures provided by the government is exacerbated by conflicting information obtained in other reports. UNCTAD cites Cuba, a member of the organization, with accumulated foreign direct investment of US$40 million in 1994, but the Banco Nacional de Cuba reported foreign direct investment of 563 million pesos (only US$11 million) in 1994.(FN6) Contrary to standard practice for the calculation of direct foreign investment, the data provided by Cuban sources appear to include the following, in addition to direct capital inflows: (1) foreign contribution of assets or debt-equity swaps, (2) supplier credits and other financial agreements, (3) foreign participation in management contracts or production partnership arrangements--defined as international economic association contracts--subject to uncertain valuations, (4) in mining, exploitation contracts to service or expand deposits already mined (with limited component of fresh capital), and (5) canceled deals and "announced" investments contingent on events that never materialize, such as a US$200 million deal announced by Mexpetrol.
    Given the absence of solid data on direct, materialized, or net foreign investment, to strike some comparisons we must use Cuba's reported committed/delivered investment in relation to net direct foreign investment in other developing countries. From a sample of eighteen developing countries, only Bulgaria reports a lower number. Moreover, Cuba pales painfully in comparison with the two countries in Latin America with comparable populations; in a similar five-year period Ecuador had approximately two-and-a-half times more net foreign investment and Chile more than seven times Cuba's presumably overstated amount. In an even more poignant contrast, between 1990 and 1995 materialized foreign investment from only one South American country in another--Chilean investment in Argentina--was 69 percent higher than the investment from the whole world reported by Cuba.(FN7) Despite the secrecy and contradictions surrounding actual figures, even the Cuban government has expressed disappointment with the results of its campaign. And the 1996 Helms-Burton law in the United States is expected to discourage investment further.

THE INVESTMENT CLIMATE
    In spite of Cuba's economic and political situation, the frequent reports of alleged business opportunities downplay and often almost completely disregard the high risks of investing in Cuba. Yet reputable annual risk ratings systematically classify the island as one of riskiest countries in the world for business. For example, Euromoney's 1995 survey ranked Cuba behind Somalia, just ahead of Haiti.(FN8)
    At the microeconomic level, the decision to invest depends on the expected return relative to the opportunity cost of the capital invested. Potential investors must develop cost-benefit analyses that assign different weights to a distinct set of risk factors in Cuba depending on the particular industry, line of business, and characteristics of the particular investment proposal. As confirmed by recent research, in addition to traditional empirical factors--demand growth, the depth of the financial sector, openness to international trade, fiscal deficits, price stability, human capital formation, and so forth--private investment patterns in developing countries are determined largely by overall country risk. In these countries, moreover, macroeconomic and institutional factors, such as vulnerability to external shocks, external indebtedness, complements between public and private investment, and shifts in income distribution, weigh heavily in a determination of country risk. Cuba fares very poorly in both traditional and particular variables, making country risk very high. This explains why the island generally has been unsuccessful in attracting foreign investment and why the amounts invested by those who do participate are very low and their return/recovery requirements very high.
    Scouting investment opportunities and actually acting on them are two very different things. The gap between high expectations for a new market and the actual result of due diligence analyses can be very wide. This has been the case since Vietnam's economic liberalization and the lifting of the U.S. embargo. In Cuba, Creditfinance Securities Inc., a Canadian investment firm, opened an office in 1993, looking to be part of the "avalanche" of expected investment. After analyzing many projects during two years of negotiations with the government, it retreated amid reports of too many obstacles to completing effective transactions, including a lack of cooperation and constant changes in the investment policy. The Catalan group Guitart, which took options in a large number of hotels, also is said to have withdrawn because of the island's "increasingly frustrating" political climate. No matter how high the adrenaline rush at the prospect of an apparently enticing new market, even Cuban officials recognize that the island presents a highly risky business climate for investors.
    Despite an upward trend in private investment in developing countries,(FN9) the fierce global competition for a vast but limited pool of capital funds underscores the need to realistically evaluate Cuba's ability to capture investment. To compensate for its shortcomings, it appears that investment authorizations will continue to include enticing inducements such as ample flexibility in the negotiation of terms, expedient capital recovery, attractive pricing, tax holidays, and 100 percent repatriation of profits.
    The following dicusion touches on some of the major risks and problems associated with investing in Cuba.

THE CONDITION OF THE CUBAN ECONOMY AND ITS PROSPECTS FOR RECOVERY
    In the last years of Soviet communism, Cuba is said to have been receiving Soviet aid of up to $6.7 billion a year. It has been calculated that the Castro regime received $100 to $150 billion in aid from the Soviet bloc over three decades, this in addition to at least $1.2 billion a year in military assistance. That is more aid than the United States provided to the whole European continent through the Marshall Plan after World War II. After 1989, with the fall of communism in the Eastern Bloc, the loss of Soviet subsidies and assistance provoked a dramatic economic collapse in Cuba. By 1993, its economy had contracted by approximately 70 percent, with a huge drop in both exports and imports. By the end of 1995, it was estimated that 80 percent of the island's productive sector was paralyzed. In March 1990, the government was forced to announce a series of austerity measures within the context of a "Special Period in Time of Peace." Topping off an already dire picture, the island has been shut out of international credit markets since 1986 for defaulting on its hard currency debt of US$10.5 billion with Western financial institutions. In addition, it owes $14.6 billion rubles to the former Soviet Union (between US$20 billion and $25 billion).
    To deal with the crisis, beginning in 1989 the government started to actively seek foreign investment, initially presenting it as a temporary measure centered on developing tourism. That was the beginning of a series of changes. A reform process started in earnest in late 1993, with the legalization of the holding of dollars, and was followed by number of measures: the authorization of certain categories of self-employment; the reorganization of land use to allow agricultural cooperatives to sell production in excess of quotas in free markets; the introduction of income taxes; the authorization of free markets for certain scarce consumer and manufactured products; the introduction of a convertible peso; and fiscal deficit-reduction measures such as the reorganization of the state bureaucracy, subsidy cuts for state enterprises, health, and education, and price increases for certain products and public services.
    The reforms appear to have produced positive effects. The decline was arrested in 1994, when annual growth of 0.7 percent was reported, followed by growth of 2.5 percent in 1995 and 9.6 percent in the first six months of 1996. But after 1994 the pace of liberalization slowed considerably amid signs of the leadership's unwillingness to continue opening up the economy. Plus, substantial spending, as a proportion of GDP, continues to be allocated to the internal security apparatus. For the first half of 1996, Minister Carlos Lage (vice president of the Council of the State, secretary of the Executive Committee of the Council of Ministers, and considered Cuba's "economic czar") recognized that Cuba's financial situation remained negative and reported a decrease of 7 percent in export prices together with a rise of 13 percent in import costs. Cuba's 1995 GDP of 13,125 million pesos, if translated into U.S. dollars at free market rates, would be equivalent to a pitiful US$596.5 million. To put this into context, sales of chopped bag lettuce in the United States in 1996 amounted to over $1 billion, twice Cuba's reported GDP!
    Regardless of the apparent improvement in a critical situation, an economy that has suffered a decline of such magnitude could bottom out but still take decades to recover its previous economic level. And the former level left much to be desired. Although Cuba had received substantial foreign capital via international bank credits, even at the height of its advantageous economic relationship with the Soviet Union it suffered shortages of food, clothing, and many basic products. In fact, its economy during the Castro period has simply been incapable of producing to cover its needs. It was able to survive an earlier collapse only because of massive Soviet support, actually defaulting on its external debt even before Soviet assistance ended.
    In light of Cuba's daunting experience, the obvious conclusion is that its severe economic decay is a result of the failed model adopted by its leadership. Socialist central planning has a recognized record of failure to generate sustainable growth and material prosperity. It has proved inherently inefficient and has been characterized by fraud, corruption, theft, and the blocking of individual initiative; it has been beset with irrational and complex regulations and norms, devoid of concepts such as self-responsibility, efficiency, and incentive, and plagued by poor organization, low productivity, and inflexible centralized decision making disassociated from the forces of supply and demand. Developing countries that have implemented successful macroeconomic stabilization programs and structural reform of legal and regulatory regimes have captured the bulk of global foreign direct investment. But despite the dismal state of the Cuban economy, structural reform of consequence remains vetoed for political reasons. Economic viability is unrealizable until profound changes are implemented.

THE LEGAL ENVIRONMENT AND THE FOREIGN INVESTMENT REGIME
    The UN's special rapporteur for Cuba has stated that its system of administering justice "is mainly at the service of the prevailing political system."(FN10) Reports by international human rights organizations detail many of the problems embodied in Cuba's legal system. Deficiencies include the subordination of the judiciary and attorney general to the executive and legislative powers, the absence of due process, and the lack of impartial trials. Furthermore, Cuba's foreign investment regime is direly deficient in comparison to the regulatory framework of most developing countries. Its Foreign Investment Law, amended in September 1995, has serious shortcomings and forces investors to accept riskier business regimes than are available in most countries. Among the problems for investors are the following:
    Very high exchange and transfer risk and unavailability of foreign exchange hedging alternatives.
    Restricted liquidity of investments. Limits on exit strategy are considerable.
    High risk of reversibility of investment agreements amid unreliability in the government's commitment to capitalism. Depending on how the Foreign Investment Law is interpreted, joint venture agreements may be terminated by the Cuban government essentially at will, without due process or adequate compensation. Cuba has signed investment protection agreements with nineteen countries(FN11) to diminish fears of expropriations, but troubling precedents already exist where investments from countries "protected" by these agreements have been unilaterally canceled, with compensation fixed by the government. Two particularly disturbing reports involve investments from Spain, which under the government of Socialist Felipe Gonzá:lez had close ties with Castro.(FN12) In 1995, amid a climate of concern, Cuban government officials finally admitted to have canceled the licenses of "dozens" of foreign firms operating in Cuba since 1992 because of "corrupt practices."
    The government's erratic commitment to capitalism concerns investors. Apprehension is fueled by repeated statements against capitalism, continued expressions of commitment to Marxism-Leninism, and the slow pace of reform. While the text of the foreign investment law is free of the typical ideological language of most Cuban laws and regulations, the National Assembly passed an accompanying statement stressing that Cuba's economic opening "is to defend and develop socialism" and "is not inspired by neoliberalism nor does it aim for a transition to capitalism." Foreigners have also expressed concern that making money is considered a crime. A May 1994 law against "excess profits" has been severely applied to Cuba's new capitalists and to successful private restaurants and taxi services. Additionally, there is fear that the government could grow comfortable with the economic improvement, reversing reforms. Analysts have pointed to a pattern of implementing reforms until their results create ideological contradictions deemed intolerable by the leadership, prompting their reversal.
    Potential claims on confiscated properties and the threat of U.S. sanctions. Land and properties subject to confiscation claims by former owners are made available for business transactions with foreign investors by Cuba's government. Claims of Cuban citizens alone are estimated at around US$7 billion. Several governments with small amounts of confiscated properties (including Switzerland, France, United Kingdom, Italy, Canada, and Mexico) have negotiated compensation agreements, reportedly with very low settlement payout ratios. But for the United States the Castro government seizures represent the largest confiscation without compensation by a foreign government in its history. Registered claims of its citizens and corporations--assumed by the U.S. government--total $1.8 billion, amounting to over $5.2 billion in 1993 with interest accruing at 6 percent annually. In March 1996, the Helms-Burton law was enacted giving U.S. citizens with valid claims the right of action in U.S. courts against investors who knowingly traffic in their confiscated properties, enabling restitution procedures against those investors who also hold assets in the United States. The law also declares the exclusion of "traffickers" and their immediate families from entry into the United States. Although both provisions are being denounced and contested as extraterritorial in certain international frameworks, it seems doubtful that they could be unilaterally overridden.(FN13)
    It appears that the Helms-Burton law has discouraged investment. A number of companies are reported to have put the brakes on investing in Cuba,(FN14) European banks have refused to extend credits for Cuba's 1997 sugar harvest, and twelve firms have informed the U.S. State Department of disengagement from activities involving potentially confiscated U.S. assets. Reports of stricter due diligence by investors have been received, in many cases with demands that the Cuban government certify that the targeted investment is clear of U.S. claims. Cuba and a few other countries have passed laws designed to counter the effects of Helms-Burton, but Minister Carlos Lage has acknowledged that Cuba's chances of attracting investment have been reduced. The issue of claims, however, has repercussions which go beyond the Helms-Burton law. Two certified U.S. claimants--Procter & Gamble and Consolidated Development Corporation--have recently challenged two joint ventures in Cuba irrespective of the right of action granted by the Helms-Burton law.
    Severe administrative and infrastructure constraints affect profitability and efficiency. Obstacles for investors include excessive, irrational, and complex regulations; the absence of such concepts as self-responsibility and managerial efficiency; poor management, auditing, and accounting practices by the Cuban partner; inability of the Cuban economy to supply inputs; restriction on sales to the local market; the chaotic state of Cuba's infrastructure--electricity blackouts, power shortages, and poor public services, extremely deficient telecommunications infrastructure and public transportation--and unavailability of domestic credit.
    Uncertainty and hassles surrounding the approval process for investment projects. The negotiation of investment agreements is generally conducted on a case-by-case basis. Apparently, paying bribes, wining and dining, and/or giving gifts to prospective Cuban partners are common practice. In addition to higher costs, this increases legal risks.
    Inability to hire workers directly. By law, foreign joint ventures must employ workers hired by a special state employment agency. This causes two major problems:
    * Workers are paid in Cuban pesos at a minimal fraction of the hard currency wages the employment agency receives from the joint venture; salaries equal what workers in state enterprises earn for equivalent or similar jobs. (In the tourist sector, a sizable portion of tips must be turned over to the Cuban management.) The amount fixed for wages by the Cuban state for the "use of labor" is very high in comparison with most emerging countries.(FN15) To keep workers motivated and compensate for salaries with minimal purchasing power, foreign firms offer direct incentives--bonuses, gifts, transportation, and meals--increasing the already uncompetitive cost of labor. Theft nevertheless remains a huge problem.
    * Hiring by the state employment agency is subject to patronage and cronyism, and workers are screened for ideas and behavior deemed contrary to official ideology, potentially limiting access to the most capable and experienced workers.
    Potential claims for environmental restitution. Experts believe the government could manipulate Cuba's environmental law as a political tool at its discretion. Environmental damage could be used as legal justification if a joint venture is suddenly deemed undesirable. Furthermore, a postrevolutionary government could penalize foreign investors by seeking environmental restitution.

SOCIOPOLITICAL RISKS
    Absence of stability and mounting sociopolitical ferment. Investments in Cuba have limited country and political risk insurance alternatives. Aside from the losses that social upheaval and even civil war would represent to investors, a future democratic government could declare a review of the terms and conditions of joint venture agreements, even their annulment, with the potential for expropriation of their assets. Opponents of the present Cuban regime regard it as a de facto government and challenge its legitimacy. The rights granted to foreigners in many of the current joint venture agreements could be declared null, with compensation fixed net of back wages confiscated from workers, environmental damage, and/or economic apartheid. Among the cited deficiencies of joint venture agreements are the fact that inexperienced and/or corrupt government officials are negotiating the terms and that information on the assets involved is lacking. The fact that foreign investors are not forced to compete transparently and adequately is likely reducing the market value of assets and concessions.(FN16)
    Social resentment directed against foreigners. The island's business regime grants access to strategic national interests and concessions to foreigners while residents of Cuba are precluded from investing, acquiring property rights, and even visiting tourist hotels. "Health tourism" offers foreigners exclusive access to top-of-the-line medical facilities, efficient service, and the latest drugs, while the population is severely deprived of the most essential drugs and medical services.(FN17) Doctors, educators, and other professionals, precluded from self-employment, are said to be earning twenty times less than those linked to the dollar economy. Discrimination and racism are added to the potentially lethal combination; ostensibly blacks are being excluded from employment in hotels and stores catering to tourists (diplotiendas). This system of socioeconomic apartheid, strictly enforced by the government, has created deep social resentment against foreign presence in Cuba both inside the island and within the exile community. Popular anger was already put into sobering evidence during the August 1994 riot in Havana; a tourist hotel and a dollar store were picked for attack by the angry mob.
    Negative international public opinion. The international profile of issues related to transnational company ethics has risen considerably in recent times. Companies are increasingly sensitive to engaging in business that raises ethical questions and could lead to consumer boycotts, negative effects on staff morale, and the alienation of political contacts. In Cuba, three areas arouse particular concern:
    * Human rights. Cuba has been condemned by the UN General Assembly for violating most universally recognized rights and is among the four worst-ranked nations (together with Iraq, North Korea, and Sudan) by the Freedom House 1996 annual survey of civil liberties and human rights in 191 countries.(FN18) In late 1995, the European Union refused to sign a commercial cooperation agreement with Cuba unless it showed advances in this area. Foreign investors have been specifically denounced for participating in worker exploitation and socioeconomic apartheid; some have even been signaled for aiding in repression. The Mexican Grupo Domos has been accused of denying telephone services to dissidents ("telephone apartheid") and accused by the New York-based Committee to Protect Journalists of allowing the telephone communications of independent journalists to be monitored and interrupted.
    * Labor rights. Cuba is frequently condemned by the International Labor Organization (ILO) for the systematic violations of labor rights.(FN19) The unique labor system of foreign joint ventures allows the government to usurp almost the entire value added of workers to the production process.(FN20) Workers in the tourist sector are subject to a series of specific duties and obligations, including the extension to 180 days of the probationary period of new employees, twenty-two new obligations, and forty-six prohibitions. In addition to the twelve just causes for termination already incorporated in the Labor Code, these employees are subject to eighty possible infractions. Disciplinary measures include fines, the loss of material incentives, and suspension of seniority rights. Refusal to join paramilitary groups has been regarded as proof of opposition to the government and has led to dismissals or loss of benefits. The labor practices of foreign joint ventures recently have been declared exploitative by the International Confederation of Trade Unions (ICFTU) and the International Regional Organization of Workers (ORIT), after a visit to Cuba. Public objection is mounting against foreign acquiescence with and participation in the abuse of labor rights. In the United States, The New Republic and The Wall Street Journal have recently reported on the issue.(FN21)
    * Environmental degradation. The collapse of the former Soviet bloc put into evidence the extreme environmental degradation imposed by improper technology, the prioritization of economic goals, and the unaccountability of an all-powerful state. Experts find Cuba to be no exception, and several dissident environmental groups have surfaced in the island in recent years. Particular concern has been expressed over the environmental implications of some recent foreign investments, particularly in tourism and mining. The Canadian company Sherritt's joint venture to mine nickel at Moa Bay has been specifically cited as presenting disturbing environmental deficiencies.(FN22)
    Industry-specific risks in the tourist sector. Aside from the prospect of future claims on confiscated lands where hotels now stand, the tourist sector is particularly vulnerable to political upheaval. Cuban officials reported that the massive exodus by raft in the summer of 1994 resulted in losses of around US$100 million in canceled bookings during the last quarter of that year. In addition, repeat visits are diminished by deficient services resulting from the country's crippled infrastructure, its difficulties in obtaining imports, lower service standards, the anguish some tourists experience when confronted with the prevailing poverty, and the system of tourist apartheid.

FOREIGN INVESTMENT'S IMPACT ON INTERNAL REFORM
    The logic for engagement supposes that reform is its ulterior purpose. To assess the potential of foreign investment/commercial engagement to bring about reform, we must address its impact in the context of Cuba's overall economic needs and how it might eventually lead to the empowerment of the Cuban people--their attainment of self-determination and universally accepted rights under a rule of law. Michael Peters, in his book International Tourism, advanced a theory on the effects of tourism and identified five potential benefits for a local economy.(FN23) Given Cuba's almost four decades of isolation from foreign influence, it is useful to borrow freely from Peters to address the overall impact of foreign investment on reform. Four of Peters's variables have to do with repercussions on the economy: (1) creation of employment, (2) generation of hard currency earnings, (3) dispersion of development to other sectors, and (4) multiplier effects. A fifth--sociological impact--will be analyzed with respect to the other four.

CREATION OF EMPLOYMENT
    Foreign joint ventures "officially" employ 60,000 workers. This represents a mere 1.3 percent of the estimated working-age population, or 1.87 percent of the estimated employed population.(FN24) With the unemployed said to be over a million, this is not significant in alleviating Cuba's grave unemployment crisis. In fact, the state is actually blocking opportunities for the creation of more jobs. Its refusal to allow other buyers to bid for this important input of the production process eliminates international and internal market forces that determine the price of labor competitively. By fixing an artificially high price for labor in foreign joint ventures, the government actually discourages and limits optimal employment by foreign capital firms (given the conditions of the market, the cost of labor would most likely be lower). Furthermore, the limited number of jobs sought by a huge pool of workers in the most desirable sector of the economy actually reinforces the need to play by the government's rules. As a result, as an element of empowerment, the employment aspect of foreign investment looks relatively meaningless and in some respects detrimental.

GENERATION OF HARD CURRENCY EARNINGS
    Assuming that Cuba actually had the US$751.9 million in investment, as reported by the U.S.-Cuba Trade and Economic Council (see table 1), and assuming a return of capital of 33.3 percent per annum,(FN25) a 50/50 partnership would generate net earnings of US$248 million per annum--US$124 million for each partner. But this equals merely around 2 percent of the roughly US$6 billion Cuba is said to have received in annual Soviet aid. (Since the level of foreign investment is presumably overstated, results would actually be lower unless a higher capital return ratio were factored in.) In fact, Minister Lage has indicated that for 1995 Cuba's net income from foreign joint ventures was only US$114 million, representing 3 percent of the country's net income. Assuming this is income derived from operations, the government should have obtained an additional US$97.5 million in tax revenues for a total of US$211.5 million.(FN26) But whether the cited total represents earnings before or after taxes, given the huge gap left by the loss of Soviet aid, neither sum would constitute an encouraging profit for Cuba. The impact of tourism--the fastest growing sector of the economy--seems significant. In 1996, Castro declared that tourism brought in an even larger gross revenue than the sugar industry. But net revenues for this sector are said to be low, due to its high dependence on imports, hefty promotional discounts, and the number of obstacles that hinder efficient operations. Analysts explain that Cuba's government statistics on average tourist expenditures make no sense compared to other more developed tourist markets of the Caribbean.
    The wage retention arrangement is the guaranteed and most lucrative source of hard currency earnings for Cuba from foreign joint ventures, generating income for the state irrespective of whether the enterprises operate profitably or not. The government appears to be appropriating around 98 percent of the total value added of labor in the production process of foreign joint ventures--in the case of specialized and highly skilled workers, even more. A Cuban-Brazilian joint venture producing cigarettes is reported to pay the state employment agency US$3,000 per month for its manager, who in turn receives $380 pesos (US$17.27), a confiscation rate of 99 percent, leaving the government US$35,792 in annual revenues. A mechanic at the plant receives $350 pesos while the employment agency gets US$916. Likewise, the employment agency is reported to receive US$2,700 for a geologist employed in Sherritt, while the geologist receives the equivalent of US$10 (at a wage confiscation rate of 99.6 percent), providing the state a return of US$32,280 per year. Earnings from wage confiscation may, in fact, total more than three times the net earnings from operations for 1995. With 60,000 workers in the foreign sector, the state could be making in wage conversion alone an estimated US$26.5 million per month, equivalent to around $317.5 million per year. In addition, labor utilization taxes and social security contributions leave the state an estimated US$33 million per month, equal to US$396.8 million per year.(FN27)
    The confiscation scheme is obviously detrimental to the workers, reported to be receiving an average monthly salary of $202.5 pesos (US$9.20). This--the average wage for all Cuban workers, including joint ventures--translates into US$2.19 per week, equal to US$0.44 a day or 5.5 cents an hour, which could be the lowest in the world.(FN28) Economists in Cuba have estimated that to buy goods at free market rates workers on the average peso salary ($202.5 pesos) have to labor 116 hours to purchase 1 kiloram of powdered milk, 70 hours for 1 kilogram of chicken, 13 hours for one lightbulb, and 500 to 1,700 hours for a pair of shoes.(FN29) Workers in the tourist sector are better off than workers in other joint ventures, primarily because of foreign currency tips. Although they are required to turn over up to 75 percent of their tips, receiving an equivalent sum in pesos calculated at the official one-to-one rate, noncompliance with rules on tips is reported to be high (although it may lead to termination of employment).
    Despite the poor wages, the material conditions of workers in the foreign enclaves is better than those of the rest of the population, making jobs in this sector the most prized. Foreign enterprises have found resourceful ways to compensate workers--bonuses, gifts, transportation to work, meals, and in some cases, clothes. In the tourist sector, in addition to getting tips, sometimes hotel workers are able to eat the food served at the restaurants and are allowed to convert tips into leftover food. On a positive note, some of these benefits have recently carried over to other areas, as the government has started to provide incentives for non-joint venture workes to compensate somewhat for the growing inequalities arising from the dollar-peso dual economy. Approximately one million workers, 25 percent of the labor force, are estimated to be receiving some form of payment in dollars or convertible pesos as rewards for meeting or exceeding work quotas. Still, those workers remain dependent on the state.
    The informal incentives provided by joint ventures provide a significant measure of relief to the workers, given the desolate state of their lot. Its importance for the favored individuals, from a humane perspective, should not be underestimated, but at a systemic level, its overall impact on empowerment is trivial. It is important to recall that, because the jobs are more precious, those employed by joint ventures have more incentive to "behave." Therefore, any material improvement in the situation of workers is at the expense of even greater political compliance and economic dependence on the state.
    Clearly, the Cuban government is the main beneficiary of the hard currency earnings derived from foreign investment. These are especially valuable for regime security during the "Special Period" of austerity. Nevertheless, in relation to the huge needs of the country, hard currency earnings derived from joint venture foreign investment, estimated at roughly $608.3 million per year--10.1 percent of one year's estimated Soviet assistance--cannot come close to enabling a significant improvement in the economy with meaningful trickle-down effects.(FN30)
    To explain the rationale underlying the foreign investment environment, it is assumed that investors are being offered deals with very enticing terms. Given the traditional premise that the higher the risk the higher the required return and Cuba's comparatively excessive labor costs, many analysts assume that Cuba's desperate situation is forcing a "fire sale" of available assets. Only that would allow the investor fast capital recovery through the generation of high earnings and also produce important benefits for the Cuban partner--a state in desperate need of revenues. Therefore, despite the peculiar deficiencies of Cuba's investment climate, foreign investors are interested in the survival of the current Cuban government and its investment agreements for the minimum period required to secure capital recovery--indefinitely to generate a stream of profits. In fact, due to their nature, the conditions and terms for the generation of earnings actually appear to reinforce the vested interest both of the state and of foreign investors to preserve existing joint venture arrangements. These have been designed to maximize short-term benefits for the partners in the context of a command economy and a closed political system.

MULTIPLIER EFFECTS
    The multiplier effects emanating from worker remuneration are limited because of wage confiscation and the low level of employment in joint ventures.(FN31) In terms of empowerment, advances are probably most perceived by the population in the informal and self-employed sectors, some of which service the foreign-generated economy. Castro himself has acknowledged the impact of tourism on employment, indicating that it supports (not employs) two million people. But the government has imposed steep taxes and fees to "redistribute" individual gains, canceling out most of their effect.
    In late 1996, the Cuban foreign investment minister confirmed that more than three-quarters of joint ventures and economic associations with foreigners involved investments no larger than US$5 million. The government has confirmed that these partnerships are typically in the export-oriented sector, or are concentrated in support businesses to foreign tourism or in extractive industries such as nickel and petroleum exploration. The impact on overall domestic production--furnishings, food, supplies, and so forth--is insignificant, as the government refuses to allow Cubans to set up small or medium-sized businesses to supply even the tourist sector. This makes it obvious that, from the Cuban state's standpoint, the rationale for foreign investment is to prioritize political necessities over structural economic reform while extracting immediate economic gains to face a monumental crisis. From the standpoint of the investor, the high-risk environment imposes an essentially speculative and short-term rationale for the payback of the investment and the generation of profits, fostering limited initial capitalization (exposure) with a focus on recovery instead of reinvestment, and restricting the typical multiplier benefits to the local economy. This is contrary to the economy's need for capitalization--that which enables the creation of domestic savings and spurs internal growth. Consequently, the nature of foreign investment in present-day Cuba is incompatible with stable and long-term economic growth and a poor precursor of reform.

DISPERSION OF DEVELOPMENT AND DISPERSION DISTORTIONS
    Foreign investment can be associated with a sociological dispersion effect on the general population similar to Peters's "demonstration effect on consumption"(FN32)--foreign consumption patterns, dress style, access to technology, vehicles, restaurants, and so forth--and accompanying idiosyncrasies. More important, foreign joint ventures--in addition to the self-employment sector--provide a living example of an alternative to the official, centralized command system and affirm market worth based on tradeoffs. Their profitable operation can help dispel the myth that decades of socialism have eliminated private initiative and entrepreneurship, demonstrating that the citizens can react positively to the pursuit of private gain and that economic relationships outside the official sphere can operate efficiently. When juxtaposed with the administrative setting of prices, this can underscore the efficacy of decisions based on supply and demand and profit orientation--which could lead to demands for eliminatation of senseless regulations and restrictions and other reforms. Precisely because the second economy creates avenues for civil society to manifest itself as distinct from the state, the people's eager embrace of capitalism has scared the Cuban leadership. Following the success of free markets, vendors are regularly swept away, and many small restaurants (paladares) are often shut down, demonstrating the government's fear that the creation of increasingly independent economic agents may dilute the formal power structure.
    Foreign joint ventures could also lead to technocratic metamorphosis,(FN33) the transformation of a select few "enlightened" state technocrats linked to foreign capital into potential agents of change. Presently, these state pseudo-technocrats(FN34) must carry out a dual role--one as party apparatchiks demonstrating continued ideological commitment to the system, another as agents of reform, cognizant that radical economic changes must be implemented and that in time they will be forced to survive in the market. This deceitful game of survival makes it difficult to assess expectations of their psychological transformation or political trajectory from socialism to the market. The key for reform, however, is their eventual attainment of any degree of significant influence to bring about change. As of today, their influence appears utterly dependent on and under the control of the state. Minister Carlos Lage has underscored the nature of their role: "In these existing joint enterprises the Cuban managers are not capitalists or the owners of those facilities. They are members of the Revolution performing the task assigned to them by the Revolution."(FN35)
    Paradoxically, although many in the leadership seem already to be positioning themselves for change, they may actually be creating greater self-incentive to preserve the regime that allows them their exclusive privileges, which they would rationally seek to protect. As in most former Communist states, a system of privilege based on political allegiance has acted as an instrument of control of the nomenklatura and, to varying degrees, permeates different levels of the technocracy. In fact, state technocrats may share with those outside the elite who benefit from the second economy but have vested interests in preserving the status quo.(FN36) The role of state technocrats in enabling reform must, therefore, be carefully assessed.
    A "make-over" of the technocracy, however, seems more consequential when a transition is actually underway. In theory, these technocrats carry the seed for the emergence of an entrepreneurial class psychologically prepared for the transition to capitalism. They could add a level of experience that could quickly turn away from revolutionary rhetoric, fully embracing the ways of the market and benefiting the privatization process. But the development of this new socioeconomic segment also breeds destructive societal forces. This may be particularly dangerous during the typically chaotic phase of a transition, when Cuban managers of foreign joint ventures would be in a position to assume undue power and control. Professor Gunn-Clissold of Georgetown University has indicated that the extremely high concentration of resources in the state sector and the centralized nature of the management system place a greater amount of power in the hands of government officials of socialist countries. The transition to a market economy creates opportunities for the nomenklatura to ransack what they can from the chaos of disintegration.(FN37)
    In fact, Cuba's brand of capitalism is already harvesting destructive societal aberrations that impede the eventual establishment of a framework to achieve social order and a rule of law. The creation of a worker elite, particularly in the tourist sector, is causing friction with the rest of the population and fueling sociopolitical tensions. The government-controlled monthly rationing system is said to provide the caloric intake for survival for approximately only half the month. The rest of the time, the population has to make do however it can. Those who have dollars, approximately 40 percent of the population at any given time (although only occasionally and in small amounts), can go to state-run shops to buy goods virtually unobtainable with their ration books or in peso stores, although they are wildly expensive. Those who don't must turn to the "informal" economy, which touches most of life and breeds pilferage, corruption, and theft. Common are anecdotes of girls prostituting themselves for a dinner at a dollars-only restaurant or a pair of jeans. The government has attempted to iron out the inequalities by redistributing wealth through taxation, but nationalistic resentment is festering, even among high government officials.
    A worrisome concentration of financial resources is taking place. A new class has been born similar to the post-Soviet Russian mafias. Cuban yuppies or "new rich," black marketers and individuals who, thanks to the liberalization of certain markets and the emergence of officially sanctioned enterprises, command large amounts of financial resources and consume conspicuously.(FN38) The uneven distribution of existing wealth is evidenced by the fact that 59 percent of deposits in the Banco Popular de Ahorrro are reportedly in the hands of 10 percent of the depositors, who hold 80 percent of the cash. The "privatization" of financial resources and capital is particularly obvious among the ruling elite, especially within the Cuban armed forces, which has access to the market, co-opting the benefits of capitalism. Officially established quasi-private or private Cuban companies have emerged, run and owned by the elite with foreign participation. Most service the tourist sector; marinas, hunting lodges, spas, and small hotels built for the military and the party are used to generate foreign exchange from tourists. The identity of the Cuban shareholders, the origin of their capital, and their earnings are shrouded in secrecy.
    The lack of equity in the privatization process taking place with foreign investor participation excludes most of the non-militant population, leaving the elite poised to take over a "reformed" Cuba. This may cast serious doubts on the legitimacy of property rights for a long time, creates the perception in the population of the nature of private property as predatory (reinforced by decades of Marxist education and rhetoric), and hinders the eventual adoption of a stable free market democracy.(FN39) The singular arrangements designed to gain access to foreign capital, through the leadership-contained, quasi-capitalist mechanisms, could best be characterized as co-opted or distorted dispersion of development. Indeed, the current situation in Russia offers a noteworthy lesson.(FN40)
    Undoubtedly, the emergence of a state-sanctioned capitalist sector, albeit controlled, has revived the entrepreneurial spirit of the Cuban people, who are being exposed to the ways of the market for the first time in over three decades. Cuban managers and workers in joint ventures witness the capitalist work ethic and the laws of supply and demand, competition, and efficiency at first hand, and the population at large does so indirectly. Nonetheless, if this were generating a widening of understanding, the crucial issue should be, Can it, or when does it, actually lead to reform/empowerment? For dispersion effects to have any meaningful impact, the premise that people can make economic decisions seems somehow implied. In a repressive regime, under which individuals or groups lack the capacity to implement change, empowerment seems independent of their psychological disposition.
    Cuba's enclave system of foreign joint ventures--captive to the nomenklatura, concessionary to foreigners, and lacking transparency and competitiveness--poses an intrinsic negation of the theoretical foundation of the capitalism that has been successful--or at least viable--in Western societies. As conceived by Adam Smith, capitalism thrives only when restrained by a system of values and a panoply of well-designed institutions that allow the market to unleash forces of progress while they control its worst consequences.(FN41) While dispersion effects of capitalist elements theoretically challenge the prevailing economic and political order, in present-day Cuba these are confined by the existing framework. As a result, a political constraint inherent in Cuba's current system prevents meaningful socioeconomic and political empowerment and forestalls the release of forces that could generate economic recovery and viability in a proper environment and a climate of internal peace. In its present form, foreign investment in Cuba is not helping to release those forces, but rather appears to assist in their containment.

THE DEBATE ON ECONOMIC DETERMINISM AND POLITICAL REFORM
    The notion of economic determinism is implicit in the argument for commercial engagement. It holds that economic development will bring about, or is a natural precursor to, political development, generally understood as that of a modern, westernized, democracy. It is argued that as people acquire economic rights or grow richer they demand more political rights, while their government gradually becomes more incapable of denying them those rights. But in reality the cause-effect dynamics of the political and economic realms open the door to a complex and subjective analysis of history and human behavior that we can only attempt to address superficially.
    We are urged to discuss economic growth briefly. Much debate about economic growth has been centered on analyses of quantifiable ratios instead of focusing on government policy or on the role of government as a motor of development. Although this aspect is fundamental to growth, it has been addressed empirically only recently. Worldwide studies are starting to provide evidence that government choices are primary to economic growth. The implication of the neoclassical theory that higher investment should mean faster growth is corroborated by data, but the data also shows that investment is not enough by itself. The problem is not so much a lack of resources, but an inability to use existing resources well.(FN42) For instance, Communist countries have had extraordinarily high investment, but because they are burdened with bad policies, they have failed to turn this into high growth.
    This offers a rationale for the pattern of worldwide growth at the heart of which are economic policies and institutions centered on competition and incentives. In a purely economics-based conceptualization of reform, it appears that investment is not able to generate significant or sustainable growth in the absence of a proper framework. And Cuba's framework is clearly inadequate. The Heritage Foundation's 1997 Index of Economic Freedoms ranks Cuba number 148 out of 150 countries surveyed, just ahead of Laos and North Korea.(FN43) The index evaluates key areas, such as trade, monetary and banking policies, taxation, government intervention, property rights, and regulatory environment. Because in Cuba economic freedoms are perceived as subversive of the prevailing order, the imperative of regime survival bars the establishment of a proper and enabling model, inherently limiting the country's capacity to achieve economic growth.
    Historical experience suggests that democratic systems are better suited to create the conditions for economic and political development, a proposition that is in effect the reverse of economic determinism, but which is empirically more conclusive. The Economist, citing a 90-nation study, reported that there is a close correlation worldwide between political freedom and prosperity.(FN44) Across scores of countries and centuries of history, democracy has promoted growth far more effectively and consistently than any other political system. Nearly all of the world's richest countries are free (meaning, among other things, democratic), and nearly all of the poorest countries are not. This study attributes to property rights the security that is necessary for capitalistic progress, proposing that the exercise of political freedoms within a context of economic freedom may lead people and firms to behave as if those freedoms will endure. Dictatorships are incapable of credibly promising that the economic freedoms created by their policies will endure. Implied is the suggestion that economic development is not properly sustained without political development. In this respect, Cuba, obviously, is not on the right track.
    It has been asserted that a multiparty democracy is best suited for, or more likely to succeed in, countries that have already achieved certain levels of development. The problem of extrapolating this logic to Cuba is that most fundamental economic prerequisites of development have yet to be established--private property, an efficient system of taxation, a banking and capital markets sector, a middle class, and so forth. Because the level of Cuban reform is so primitive, and economic rights have not been atained by the people, this plane of theorizing does not seem relevant. As a result, it might be inferred that the move toward reform is fueled by the level of economic and political freedom attained by a society at a given time, measurable by variables such as private property, taxation, freedom of press, and wages. This level is attained when a framework is put in place that can reach the critical point at which it fosters its own evolution. Once again, Cuba is far from such a stage.
    To attempt a better understanding of the relation between economic and political reform in Cuba, it is imperative to uncover not only the apparent, but also the more subtle dynamics of this relationship. Part of the problem in correctly interpreting Cuba's reform process may have to do with the marked contrast between what the government portrays to the outside world and what it says and does inside Cuba. To the world, and particularly to foreign investors, its highest officials have tried to sell Cuba by depicting its process of liberalization as a search for "an achievable utopia," "a new and unique model," "where political reform is not excluded" and "socialism has adapted to new world conditions with some elements of the market." This amorphous definition of intentions is interpreted by eager observers as an exciting transition to a market-based economy.
    In actuality, the Cuban leadership has avoided comprehensive reform and remains well aware of the threat that reforms convey. Castro continues to decry capitalism and has declared emphatically that Cuba cannot take the risk of repeating the mistakes of the former Soviet bloc. The leadership has repeatedly confirmed its resolve to defend the political status quo and preserve the Marxist-Leninist ideology, the socialist economic system, and the revolution--whatever it may represent today. Changes on the economic front have been justified as necessary evils to secure economic survival without a loosening of political control. (This is typically packaged as the "need to preserve the 'achievements' of the Revolution.") In August 1995, the president of the State and Ministerial Councils clearly stated the government's intentions; these are strangely reminiscent of Lenin's New Economic Plan to advance Communist ends through capitalist means:(FN45) "during many years we fought against foreign investment ... however, in the current situation we could not do without foreign investment at a higher level, because we needed capital, technology and markets.... We took this path because this was the only alternative ... the key of all this is the issue of power. Who has the power? That is the key.... Transition to capitalism? There will be no transition to capitalism."(FN46)
    In the final analysis, assumptions and vague generalizations on Cuba's reform process have to be tested against reality. Within the context of Cuba's liberalizing measures and its opening to foreign investment, the question of externally generated pressure for reform should not miss the crucial point. With respect to Cuba, as with other totalitarian systems, the root issue is how can it, or will it, actually lead to change? We have not seen such cause-and-effect nor has it been proved inevitable. Indeed, perhaps the most telling measure of engagement's outcome is that it has failed to produce tangible payoffs despite Cuba's normal commercial and political relations of many years with most countries. The executive director of Human Rights Watch recently concluded, "Any improvement in the island's economy which may have resulted from the arrival of European investment has not been matched by any greater opportunity for civil society."(FN47) This is possible because mechanisms of control operate and remain effective at all levels. In fact, sophisticated tactics of repression have emerged to counter potential erosions of power and break down the growing internal opposition without provoking a worldwide outcry. New forms of institutionalized violence based on popular mobilization have been introduced,(FN48) and dissidents are habitually threatened and harassed, intermittently imprisoned, and coerced to leave the country in lieu of the long jail terms of the past. Aside from the mechanisms of control embodied in the Foreign Investment Law, specific measures are taken in the foreign sector to curtail the emergence of an empowered second economy (including prescreening applicant workers for "revolutionary behavior," requiring that hotel management commissions have Communist Party representatives, and targeting workforce reductions at employees of certain political views).
    Another factor that contradicts a deterministic cause-effect in the notion of engagement is the possibility that if economic pressure diminishes on a leadership bent on self-preservation, the need to take such high risks may be eliminated. Thus, when economic measures bring relief, their success may actually discourage more reform. Indeed, the argument has been made that foreign investment has been used as a means to avoid or postpone necessary changes rather than acting as an agent in support of reform.
    Given the depths of the economic and social crisis that Cuba has already endured without an aftermath of consequence, it seems highly improbable that any further internal discontent will make a difference. This was poignantly proved when the regime abandoned Communist orthodoxy, which entailed an enormous loss of legitimacy. The emerging and powerful contradictions to the egalitarian socialist ethos--the debacle on the ideological front, the shocking economic failure of the socialist model, the blatant inequalities of selective capitalism, and the severe hardships that have befallen the population--have not generated a change in the repressive nature of the regime. As long as the regime retains the means of control, it looks as if the instruments of legitimization can be manipulated. Moreover, because in Cuba power is strongly centralized and forcefully exercised, and decision making is very vertical, market forces--which operate spontaneously and in a decentralized manner--is inherently constrained. A systematically repressive apparatus thus appears to have tremendous impact on the feasibility and timing of political change regardless of economic reform. When the leadership is committed to survival at all costs, regime legitimization is not the issue; the issue is capacity to exercise control. Because regime survival is rationally prioritized over other goals, including economic recovery, foreign investment in Cuba is in essence hostage to the prevailing dialectic. On that account, the main theoretical argument for engagement is essentially flawed at the core.
    Particularly in the aftermath of the February 1996, forceful crackdown on the internal dissident movement, reform in Cuba seems a distant illusion, as the leadership's priorities have been forcefully reasserted.(FN49) This was confirmed by Raúl Castro's speech of March 1996, which delivered a forceful blow to moderates and reformists within the leadership, and the July 1996 enactment of a Code of Ethics for Party Members. The precariously organized dissident movement continues committed solely to peaceful change and has been kept fragmented and repressed by State Security. With the pervasive control of State Security, in allegiance with and dependent on regime survival, it seems unlikely that the population, too busy struggling to cover its basic needs, would attain means to organize an effective opposition movement. Consequently, little change can be expected short of a dramatic and unexpected turn of events.

IMPLICATIONS FOR FOREIGN POLICY FORMULATION
    Commercial engagement generates the creation of vested business interests rationally bent on self-preservation, inclined to override objectives irreconcilable to it goals. Because business concerns tend to have ample financial resources at their disposal, they can secure considerable political clout with relative ease. Therefore, the risk that decision making will be tilted in their favor is high.(FN50) But in the pursuit of attractive profits, investors have historically overlooked considerable risks, often hurting their own interests and provoking devastating consequences. Many historic financial crises have demonstrated that overzealous and negligent cross-border profit seeking has been painfully common, which should be instructive given the higher level of sophistication expected of the financial industry.(FN51) Cuba's defaulted debt offers a prime example of shortsighted and greedy capitalism at work.(FN52)
    A reductionist application of the logic of commercial engagement could tilt policymaking in favor of narrow, short-term business considerations that hinder the development of sound foreign policies. Responsible policymaking must seek to balance a convergence of interests--geostrategic, economic, political, and ethical--that address the overall long-term development of Cuba. Ultimately, it is genuine economic and political well-being on the island that can meet the comprehensive interests of the international community and provide lasting opportunities for business.

CONCLUSION
    Conditions and characteristics unique to Cuba currently inhibit the workability of commercial engagement. Because Cuba's business climate cannot attract a meaningful level of investment and the character of its business regime inherently restrains its ability to induce reform, foreign investment serves primarily as a tool of regime survival. The political imperatives of the regime will continue to dictate the terms of engagement and foreign investment in Cuba, precluding meaningful economic and political development for as long as the leadership retains the means to impose power by force. The ruling elite will likely continue to prevent changes, which would provoke its demise through a loss of state control, no matter what economic gains they might bring about. For commercial engagement to work, it would have to advance the very practices that threaten the regime, becoming a tool of "conditional engagement." This more realistic policy should seek the dismantling of reform-disabling mechanisms of control that the Cuban government has effectively and successfully maintained.
    The quality of the debate on Cuba would greatly benefit if the limits of commercial engagement as a policy prescription are acknowledged and our expectations adjusted accordingly. In the final analysis, we are compelled to recognize that Cuba's problems are more complex than resolving the issue of whether or not commercial engagement is a suitable instrument of foreign policy to foster reform. Ultimately, external influence or pressure may not be capable of bringing about the desired democratization and economic viability of Cuba; those goals will probably remain primarily dependent on internal circumstances and events. Cuba's predicament, thus, precludes simple answers.
    Added material
    Maria C. Werlau is general manager of Orbis International Consulting, Chatham, N.J.

TABLE 1
    Foreign Investment in Cuba, 1990-1 August 1996 (U.S.$)

Country Announced Committed/delivered
Australia 500,000,000 __
Austria 500,000 100,000
Brazil 150,000,000 20,000,000
Canada 941,000,000 100,000,000
Chile 69,000,000 30,000,000
China 10,000,000 5,000,000
Dominican Republic 5,000,000 1,000,000
France 15,000,000 10,000,000
Germany 10,000,000 2,000,000
Greece  2,000,000 500,000
Honduras 7,000,000 1,000,000
Israel 22,000,000 7,000,000
Italy 97,000,000 87,000,000
Jamaica 2,000,000 1,000,000
Japan  2,000,000 500,000
Mexico 2,256,000,000 250,000,000
Netherlands 300,000,000 40,000,000
Panama 2,000,000 500,000
Russia 25,000,000 2,000,000
South Africa  400,000,000 15,000,000
Spain 350,000,000 125,000,000
Sweden 10,000,000 1,000,000
United Kingdom 75,000,000 50,000,000
Uruguay 500,000 300,000
Venezuela 50,000,000 3,000,000
 Total 5,301,000,000 751,900,000

NOTE
    Figures represent the amounts of announced, committed, and delivered investments since 1990 by private sector companies and government companies from various countries to enterprises within the Republic of Cuba as of 1 August 1996. Information compiled through the media, other public sources, individual discussions with company representatives, non-Republic of Cuba government officials, and Republic of Cuba-based enterprise managers and government officials.
    Source. U.S.-Cuba Trade and Economic Council, 28 September 1996.
    TABLE 2 Net Foreign Investment in Selected Developing Countries, in U.S.$millions

In Latin America
 Mexico 31,015
 Argentina  19,259
 Brazil 13,376
 Colombia 6,562
 Chile 5,498
 Venezuela 4,762
 Peru 4,567
 Ecuador 1,913
Rest of the World
 Malaysia 26,867
 Indonesia 12,965
 Portugal 11,503
 Philippines 3,765
 Poland 8,073
 Greece 6,042
 South Korea 5,047
 Thailand 10,104
 Morocco 2,414
 Bulgaria 391

    Source. J. P. Morgan, July 1996.

FOOTNOTES
    1. This policy line was codified in the 1992 Cuban Democracy Act, passed during President Bush's term. It seeks to increase people-to-people contacts with looser restrictions on academic and cultural exchanges.
    2. See Cuba in Transition 4 (1996).
    3. "Heroic Illusions: A Survey of Cuba" ("Cuba Survey"), The Economist, 6 April 1996, 15.
    4. The average investment is said to give Cuba at least 51 percent ownership. Although the Foreign Investment Law authorizes 100 percent foreign ownership, majority foreign ownership is a rare exception.
    5. The New York based Council's stated objective is to "provide an efficient and sustainable educational structure in which the U.S. business community may access accurate, consistent, and timely information and analysis on matters and issues of interest regarding United States-Cuba commercial, economic, and political relations." Founded in June 1994 as a non-profit organization, it does not take official positions vis-à-vis Cuba policies as its tax status precludes advocacy. In July 1996, the council had 138 members. Mr. Kavulich explains that the secrecy surrounding the council's membership since its inception is for of "competitive reasons." The Cuban press has reported that Mr. Kavulich is "the main bridge between U.S. businessmen and Fidel Castro's government" and has "a special mission to open avenues, dissipate doubts, show the cracks through which to penetrate the wall of the blockade." Telephone conversations of July 1996 with Mr. Kavulich; "Why the Council Was Established," U.S.-Cuba Trade and Economic Council; Homero Campo y Orlando Pé:rez, "Business Are [sic] Business: y Exxon, IBM, ITT, Ford, y General Electric ya disbloquearon a Cuba," Proceso, Semanario de Información y Aná:lisis 959 (20 March 1995); "John Kavulich: no me importa caminar sobre un campo minado," Bohemia; Caribbean Update 10 (Diciembre 1994); Kisnet Corporation Inc., and Michael Hayes, "New York Entrepreneur Offers Facts, Figures, on Cuban Market," Miami Today, 25 August 1995. Translations from Spanish by the author.
    6. Cited in Jorge Pé:rez-López, "Odd Couples: Joint Ventures between Foreign Capitalists and Cuban Socialists," The North South Agenda Papers 16 (November 1995).
    7. Materialized investment by Chile in Argentina for 1990-95 totaled $2.4 billion dollars (of $5.9 billion committed). In 1995, materialized foreign investment in Chile amounted to US$1.03 billion and US$1.985 billion in the first six months of 1996.
    8. "Cuba Survey," 12. Euromoney's ranking includes 181 countries.
    9. The World Bank reported that private capital flows to developing countries totaled US$244 billion in 1996 and make up more than 80 percent of long-term financial flows to poor countries.
    10. October 1995 report of the United Nations Rapporteur for Cuba, 4. Translated from the Spanish version.
    11. Italy, Russia, Spain, Colombia, Great Britain, China, Ukraine, Bolivia, Vietnam, Argentina, Lebanon, South Africa, Romania, Chile, Barbados, Germany, Greece, Sweden, and Switzerland.
    12. In May 1995, hotel investments entered into in 1991 by the Spanish utility company Endesa's pension fund were unilaterally canceled by the Cuban government. Spanish directors were replaced by Cubans and Endesa bank accounts in Cuba were frozen. The Spanish investor has taken its dispute to the International Arbitration Tribunal in Paris, demanding $12 million from the Cuban partner, which it claims was not fulfilling its contractual obligations. In 1992, Castro also decreed the nationalization a Spaniard's 49 percent participation of Comodoro discotheque, unilaterally fixing the amount of economic compensation.
    13. The Clinton administration considers the law a matter of national security "fully consistent with U.S. international obligations." Enforcement of Title III has been suspended by presidential waiver pending consultations with allies to build support for the promotion of democracy in Cuba.
    14. Some examples: Mexico's Cemex terminated its contracts in Cuba; American Express severed business links to Cuba; Occidental Hotels canceled contracts to manage four Varadero hotels; Grupo Vitro, a Mexican bottling company, canceled investment plans said to include property confiscated from Owens-Illinois. Grupo Domos, whose telecommunications joint venture is Cuba's largest privatization is subject to a $131 million claim by an ITT subsidiary had trouble selling and attempting to syndicate a portion its US$320 million investment when promised financing from Mexico did not materialize. Recently, it was reported that Italy's STET had purchased Domos' share for US$300 million.
    15. The average monthly salary paid to the Cuban state employment agency is said to be around US$450 per worker, whereas the average salary for garment workers in countries such as Honduras, Dominican Republic, El Salvador, Costa Rica, and Guatemala ranged between US$100.80 and $176.40 in 1993.
    16. In Rolando Castañeda and George Plinio Montalvá:n, "The Arcos Principles: Joint Project of Gustavo Arcos Bergnes, on Behalf of the Cuban Committee for Human Rights and the International Society for Human Rights," draft dated 4 August 1994 presented at the Fourth Annual Conference of the Association for the Study of the Cuban Economy, 6 (published as "The Arcos Principles," Cuba in Transition 4 (1994). Castañeda and Montalvá:n cite as an example the privatization of Mexico's Grupo Domos, a family enterprise of real estate development and waste management inexperienced in the area of telecommunications, was professedly granted a fifty-five-year monopoly in telecommunications without a guarantee of efficiency and competitive prices/services.
    17. The State company SERVIMED offers "sun and medical attention" to foreigners through programs that include medical treatment, airfare, and accommodations. In 1995, health tourism reportedly brought in 3,500 tourists and generated hard currency revenues of US$24 million.
    18. Freedom in the World: The Annual Survey of Political Rights and Civil Liberties, 1995-96 (New York: Freedom House, 1996).
    19. The most frequently cited I.L.O. violations by Cuba are to Conventions 95, on the Protection of Wages; 87, concerning Freedom of Association and Protection of the Right to Organize; 29, concerning Forced Labor; 111, concerning Discrimination in Employment and Occupation; and 89, concerning The Right to Unionize and Engage in Collective Bargaining.
    20. Cuba has institutionalized the monopsonistic (single buyer) exploitation of the labor force. (Economic theory defines exploitation as paying a resource less than the value of its marginal product.)
    21. See Charles Lane, "Canada Sly," The New Republic, 6 August 1996, and The Wall Street Journal, 5 August 1996.
    22. The Globe and Mail of Toronto, 31 July 1995, indicated that pollution at Moa is intense and particularly endangers the 60,000 residents of a nearby town. According to The New Republic, Sherritt has committed to a significant environmental clean-up, which is said to account for much of the $150 million dollars in spending promised for the next five years, after which the company has said is aims to have the Moa plant operating "in line with international practices," i.e. those followed in North America.
    23. Michael Peters, International Tourism (Hutchinson Publisher, 1969), cited in Gillian Gunn, "The Sociological Impact of Rising Foreign Investment," Georgetown University, Cuba Briefing Paper Series 1, January 1993, 6.
    24. Cuban Minister Lage has, nonetheless, indicated that foreign joint ventures employ 5 percent of the workforce. (In 1995, the workforce was said to be 4.3 million, the estimated employed population 3.2 million.)
    25. An assumed three-year rate of return of capital is an average minimum return for high risk crossborder investments. This capital recovery ratio is reported for some foreign joint ventures in Cuba.
    26. Assuming Cuba had a 50 percent share of every joint venture, earnings before taxes would total US$325 million (a 30 percent tax would net the state US$97.5 million). Net income after tax would equal US$228 million, of which 50 percent represents $114 million in revenues for Cuba, coincidentally the figure reported by Cuba for 1995.
    27. These are rough estimates based on the average salary of US$450, paid to workers as 202.5 Cuban pesos, times 60,000 workers said to be employed in foreign joint ventures. An 11 percent labor utilization tax on gross salaries and social security contributions of 14 percent of wages--paid by the joint venture in hard currency but registered on behalf of workers in pesos at a one-to-one exchange rate--leaves the government an estimated US$35.6 million and US $43.3 million per annum, respectively.
    28. A reported peso-dollar rate of 22 was used for this calculation. Estimated US dollar hourly wages for garment workers in the spring of 1996 were: Pakistan .26, China .28, Bangladesh .31, Indonesia .34, India .36, Haiti .49, Egypt .63, Mexico 1.08, Honduras 1.31, El Salvador 1.38, Peru 1.39, Brazil 1.92, Taiwan 5.10, Britain 9.37, United States 9.56, Canada 9.88, Italy 14.32, Germany 18.43. New York Times, 1 February 1997.
    29. Study conducted by Instituto Cubano de Estudios Sindicales Independientes for year-end 1996, distributed by CubaNet, 10 March 1997.
    30. Earnings were calculated as follows: $114 from operations (Minister Lage's report for 1995), $97.5 million in taxes of 30 percent on $751.9 invested, and our estimated $396.8 million in labor utilization revenues. (Tips were not included, as it is very difficult to estimate a reliable number.) Telecommunications payments made by U.S. companies ($76.8 million up to 1995) constitute additional hard currency earnings for Cuba.
    31. The average size of the Cuban family is four. With 60,000 employed in joint ventures, roughly 240,000 people are calculated to depend on those jobs--around 2 percent of the population. The exception is in the tourist industry, where workers have access to tips. Assuming 40,000 are employed in tourism, an estimated US$7.5 million per month in tips (US$187.5 per worker) cannot have a significant impact on the economy.
    32. Peters, International Tourism.
    33. Term borrowed from James Shinn, "Engaging China: exploiting the fissures in the facade," Current History 95 (September 1996).
    34. This terminology, pseudo-technocrat, has been chosen because Cuban high level technocrats must show proved political commitment in addition to technical/professional proficiency.
    35. Gunn, "The Sociological Impact of Rising Foreign Investment," 3.
    36. It has been argued that "the individualistic, wheeling-and-dealing oriented, subculture created by the second economy does not encourage the kind of collective action necessary for revolution and the violent overthrow of a regime." Jorge Pé:rez-López quoting Sik, "Cuba's second economy and market transition," draft of 25 March 1995 prepared for the conference "Towards a New Cuba," Princeton University, 7-8 April 1995, 15.
    37. Gunn, "The Sociological Impact of Rising Foreign Investment," 23, 25.
    38. This special class is said to drive flashy cars and talk on cellular phones on the way to power lunches. A sociologist at Havana's Centro de Estudios de Amé:rica has reported on a recent study that has detected and the accumulation of capital in few hands: "the main beneficiaries of the economic adjustment have been the 'macetas,' a type of mafia with the pretension of becoming bourgeoisie."
    39. See Jorge A. Sanguinetty, "Economic education of a market economy: the Cuban case," Cuba in Transition 5 (1995): 467-73.
    40. There, amid reports of a Mafia-type anarchy, former government officials now control most of the shares of huge former state conglomerates and companies that were privatized in a process marred by official corruption, bribery, favoritism, and criminal acts. Former Communists--less than 10 percent of the population--have prospered; nearly two-thirds of the country's millionaires are reported to have been members of the Soviet Communist Party or the KGB.
    41. See, for example, Jerry Z, Muller, Adam Smith in His Time and Ours: Designing the Decent Society (New York: The Free Press, 1993).
    42. David Reiff provides a pointed allusion to Cuba's "record of unbroken failure": "One has only to imagine what the Singaporean leader Lee Kuan Yew or the military bosses of South Korea, Taiwan, or Thailand would have done with 25 years of subsidies on the order of those the Soviet Union funneled to Castro to appreciate how badly the regime has bungled the economy." David Reiff, "Cuba Refrozen," Foreign Affairs (July/August 1996): 69.
    43. Cited in U.S.-Cuba Policy Report 3 (December 1996): 9.
    44. "The Poor and the Rich," The Economist, 25 May 1996, 24. The cited study is former World Bank's Surjit Bhalla, "Free Societies, Free Markets and Social Welfare," paper presented at the Nobel's Symposium for Democracy, Uppsala University, August 1994.
    45. Lenin was convinced that the Communists needed help from the capitalists to learn how to run the economy. He spent most of his life at the epicenter of an international conspiracy predicated on the idea that the capitalist world order could be subverted and overthrown by a small cadre of professional conspirators who would mislead opponents into collaborating in their own destruction. In 1921, he masterminded the Trust Operation to obtain help from abroad to help Russia survive a desperate economic crisis. Passing along to Western intelligence misinformation portraying Lenin's' economic reforms as signaling the eventual abandonment of communism, made Western governments give up their economic sanctions in the belief that they could achieve the overthrow of communism. For Lenin the end justified the means; he was willing to do whatever was necessary, even when it deviated from, or contradicted, Marxist ideology. See Edward Jay Epstein, Dossier: The Secret History of Armand Hammer (New York: Random House, 1996) and Robert C. Tucker, Ed., The Lenin Anthology (New York: W. W. Norton & Company, 1975).
    46. Lane, "Canada Sly."
    47. José: M. Vivanco, European Voice, 19-25 September 1996, 14.
    48. Namely, the Rapid Response Brigades (Brigadas de Acción Rá:pida)--paramilitary groups ready for immediate action--and Popular Acts of Repudiation (Actos de Repudio).
    49. In mid-February 1996, Cuba's security forces unleashed a violent crackdown against delegates to Concilio Cubano--an umbrella organization of peaceful dissident groups--to prevent their holding its first assembly, scheduled for 24 February. The same day the disrupted meeting was to take place, Cuban MIGs downed two small, unarmed, civilian aircraft belonging to the Miami-based organization Brothers to the Rescue, dedicated to rescuing Cuban rafters. After examining the evidence, an investigation by the International Civil Aviation Organization established that the aircraft were shot down over international waters; its conclusions were endorsed by the UN Security Council. See UN Rapporteur's October 1996 Interim Report.
    50. Curiously, in the early 1920s Lenin bet that "the capitalists' presumed greed could be used to the Soviet advantage." Concessions to foreign capitalists were part of Lenin's strategy--the "bait" to help over-come the political hostility of businessmen, who, looking to obtain better terms vis-à-vis their competitors, would pressure their respective governments to lift restrictions on trade. Epstein, Dossier, 59.
    51. In the last two centuries, U.S. financial institutions and private investors have gravely overlooked risks in assessing international lending and investment opportunities considered highly profitable at one time. (The author's Masters' thesis is a study of the 1980s international debt crisis that examined commercial bank lending and financial crises in Latin America since its independence.)
    52. In the early 1960s, the Castro government repudiated Cuba's international financial obligations and confiscated all foreign properties in the island. But only two decades later--starting in the late 1970s--European, Japanese, Canadian, and Arab commercial banks made voluminous loans to Cuba based on credit risk analyses that disregarded very high risk factors. By 1982, Cuba could not meet its financial obligations and in 1986 walked out of negotiation talks with the Paris Club. Its hard currency debt remains in default, the government refusing to enter into reprogramming programs. During the 1980s international debt crisis, Castro attempted to form a debtors' cartel to repudiate developing countries' debts.

WBN: 9728800072001