Investing in Cuba remains a tricky bet

Foreign news outlets have taken a liking to labeling the Cuban government’s recent passing of its Foreign Investment Law as a liberalization of the Cuban…

The acute deterioration of the transportation system is among the perils of investing in Cuba. (AP Photo/Franklin Reyes)

Foreign news outlets have taken a liking to labeling the Cuban government’s recent passing of its Foreign Investment Law as a liberalization of the Cuban economy and as an exemplary fact of the diminishing sway of Communist ideology over the regime.

SEE ALSO: Cuba’s confusing dual currency system

And yet, as Pedro Roig –senior research associate and lecturer at the Institute for Cuban and Cuban-American Studies at the University of Miami— explains, foreign investment in Cuba remains a tricky bet and the liberalization of the domestic economy remains tentative, to say the least.

Amongst the greatest risks to foreign investment, Roig highlights the antiquated state of the Cuban Constitution, the decrepit state of the island’s infrastructure, persistent human rights’ violations, and the failures of the food and agriculture sectors.

First off, Roig centers on the paradoxical nature of labeling Cuba’s Foreign Investment Law as “liberal” when considering the country’s constitution. While the piece of legislation does promote a greater influx of foreign assets, it does little to curb the inherently communist nature of a Constitution, which stands in stark contrast to this legislative bill.

Investing under the Cuban Constitution

The true of Investing in Cuba under Castro's government

Is dangerous to invest in Cuba under a Communist ideology . (AP Photo/Dario Lopez-Mills)

The Cuban Constitution, which was last revised in 2002, still maintains that the national economy is to be centralized and run by the state; further, all means of production are controlled by the government and there is no recognition of property rights. Hence, the potential for foreign investment perfectly contradicts these injunctions by positioning capitalism in a head-to-head confrontation with communism.

Furthermore, because of the very nature of the Cuban legal system, investors can count on little to no protection from a judges and trials, which ultimately fall under the jurisdiction of the state.

Beyond the hazardous state of the legal system, Roig places a major emphasis on the decrepit state of the island’s infrastructure as a further deterrence to foreign investment.

The dilapidated infrastructure afflicts all sectors: from roads and highways, to ports, to water and sewage systems, to the energy grid, to telecommunications systems, etc.

Without a basic transportation network, it’s unlikely that foreign funds could be effectively used within Cuba. As Roig expands, “…Cuba’s principal ports are unable to accommodate large, modern vessels.” This lack of preparedness for waterway commerce only exasperates the problem.

The issues extend to water and sewage where 58% of portable water is lost through leakage and telecommunications, as only 3% of Cubans have access to the Internet.

When coupled with the lack of a steady food supply and the unstable situation in Venezuela – which is Cuba’s main supplier of oil and one of its main suppliers of aid—these infrastructural problems are only the tip of the iceberg. Essentially, even if the impetus did exist do accept foreign funds, Cuba does not count with the institutions and structures to handle them in the first place.

Finally, and perhaps most impactful in terms of the suggested liberalization of Cuba, is the manner through which corruption percolates all aspects of daily life on the island nation. As Roig states, “Investors are discouraged by corruption since it increases the financial burden on the business.

Unlike taxes, that are known and predictable and can be built into the expected cost, bribes, theft and extortions are difficult to control and unpredictable in magnitude and will negatively impact cost control, reduce profits, undermine investor confidence and unleash a commercial climate of fear and uncertainty in a country in which the revolutionary leadership control the judicial system.”

Essentially, then, Cuba consists of all the characteristics that are least desirable when considering prospective locations for foreign investment.

The island remains mired 60 years in the past, with a nearly non-existent judiciary, run-down infrastructure, and immeasurable corruption. Hence, even with the passing of the bill, true foreign investment of the type and scale seen in the other Latin American nations will remain impossibility until all these sectors are first reformed.

Cuba isn’t liberalizing; it’s simply pretending to do so.

SEE ALSO: The problem with buying food in Cuba