Cuba struggles with foreign investment, growth

HAVANA Fri Sep 7, 2012 4:20pm EDT

A man with a private license to sell vegetables pushes his cart on a street in Havana February 29, 2012. REUTERS/Enrique de la Osa

A man with a private license to sell vegetables pushes his cart on a street in Havana February 29, 2012.

Credit: Reuters/Enrique de la Osa

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HAVANA (Reuters) - Cuba's failure to encourage more foreign investment is crippling its economic performance and putting its goal of sustainable growth in danger unless changes are made, local experts and diplomats said this week.

The communist island is in the midst of market-oriented reforms to its Soviet-style system that supposedly will make the island more investor friendly, but potential investors say the Cubans have not yet put out much of a welcoming mat.

The National Statistics Office said this week that investment by Cuba and its foreign partners was 4.3 billion pesos in 2011, just 100 million pesos more than the previous year.

The 2011 figure is equivalent to 15.9 percent of Gross Domestic Product, which is an improvement over recent years, but far below what the country needs, according to a local economist.

Omar Everleny, head of the University of Havana's Center for the Study of the Cuban Economy, said earlier this year that Cuba had averaged investment, or what he called "gross fixed capital formation," of just 13 percent in recent years, compared with an average of 23 percent in the rest of Latin America and the Caribbean.

Cuba needed to "sustain a higher rate of investment," he said in a presentation at a closed door seminar, a copy of which was obtained by Reuters.

Everleny argued that only foreign investment could close the gap, given the country's longstanding financial difficulties.

"International experience shows that countries that have achieved significant growth and improvement of their infrastructure and standard of living have had investment rates of not less than 30 percent of the GDP, with significant support of direct foreign investment," he said.

The Cuban economy grew 2.7 percent last year and 2.4 percent in 2010, lagging well behind the region.

FOREIGN FRUSTRATION

Cuba's investment reform plan announced last year spoke positively of foreign investment, promised a review of the cumbersome approval process and stated that special economic zones, joint venture golf courses, marinas and new manufacturing projects were planned.

But there have been more promises than changes and many obstacles to foreign investment remain, diplomats said.

A number of countries and their companies, from China, Russia and Brazil to Singapore and various European Union members, have expressed interest in investing in Cuba despite the U.S. trade embargo against the island, but to no avail.

They said the government is demanding a majority interest in all joint ventures and is dragging its heels or obfuscating in negotiations.

Part of the problem is Cuban concern about maintaining its independence and sovereignty, said a diplomat from a friendly Latin American country.

"The Cubans have an ideological problem, and it's not Communism, but nationalism," he told Reuters

"Our companies are simply not interested in only minority shares, which is all they offer ... then they go around boasting about how no foreign company owns a piece of their country," he said.

It is a complaint shared by many others, who said the Cubans were insisting on 51 percent ownership of new ventures, which companies do not want because they effectively lose control.

Another diplomat from a European country said even signed agreements languish because of the difficulty of finalizing details, whether it be due to lack of government clarity or changes it wants to make.

"We signed an important agreement three years ago and it's gotten nowhere," the diplomat said, blaming the delay on issues such as Cuba's two parallel exchange rates. "When you get down to details with them, the outcome gets hazier and hazier," he said.

Another diplomat, from Asia, said it is also clear that the slow-moving government is a long way from turning its plans into reality.

He said his government had recently approached the Cubans about putting businesses in the promised special economic zones, only to be told to come back later after a law governing them was approved.

(Reporting By Marc Frank; Editing by Jeff Franks, David Adams, Gary Hill)

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