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