Liberalizing Investment in Cuba

APRIL 23, 2014 10:43AM

Liberalizing Investment in Cuba
By SIMON LESTER SHARE

I'm no Cuba expert, but I have followed the events of recent years with
interest. It seems that there have been tentative steps towards
liberalizing the Cuban economy, as well as slightly better economic
relations between the United States and Cuba. I'm hopeful the long-term
trend is towards Cuba becoming a free market democracy, with normal
relations with the United States.

In the short-term, though, I'm frustrated by how the "liberalization" of
foreign investment is being carried out there. Here's the Economist:

But on March 29th Cuba's parliament approved a new foreign-investment
law that for the first time allows Cubans living abroad to invest in
some enterprises (provided, according to Rodrigo Malmierca, the
foreign-trade minister, they are not part of the "Miami terrorist
mafia"). The aim is to raise foreign investment in Cuba to about $2.5
billion a year; currently Cuban economists say the stock is $5 billion
at most.

The law, which updates a faulty 1995 one, is still patchy, says Pavel
Vidal, a Cuban economist living in Colombia. It offers generous tax
breaks of eight years for new investments. However, it requires
employers to hire workers via state employment agencies that charge (and
keep) hard currency, vastly inflating the cost of labour.
Welcoming new foreign investment is great. Here's the problem, though:
In order to liberalize investment, a government really doesn't need to
do anything fancy. It can just say, "foreign investment is permitted,
and will be treated like domestic investment." Very simple. Furthermore,
lower tax rates and reduced regulatory burdens can help encourage such
investment. Again, very simple.

In practice, though, governments make this process difficult and less
liberalizing. Here, what Cuba seems to have done is offered special tax
breaks for new foreign investments, and then subjected receipt of these
tax advantages to certain hiring conditions. In effect, it introduces
two distortions as part of the liberalization process: favoring new
foreign investors over other investors through the tax code and then
subjecting the favored investors to additional regulation.

To be clear, Cuba is not the only country who does this; this is what
many countries do. But there's just no reason to approach it this way.
The simpler way, with low tax rates for all investors, is the more
economically beneficial way. Unfortunately, it seems as though
"liberalization" is often just a catchword, and governments insist on
using their power to intervene in private economic transactions, even
when ostensibly moving away from interventionist policies.

Source: Liberalizing Investment in Cuba | Cato @ Liberty -
http://www.cato.org/blog/liberalizing-cuban-economy