A DIFFERENT KIND OF WORKPLACE:
Foreign Investment in Cuba
by Philip Peters
Senior Fellow, Alexis de Tocqueville Institution
MARCH 1 999
INTRODUCTION
Cuban socialism and foreign capital have only recently become
acquainted.
For its first three decades, Cuba 's socialist government largely kept
foreign capital investment at arm's length. The reason had nothing to
socialist
theory—indeed, foreign capital was present in the Soviet
do with
Union from its beginnings. Rather, the Cuban revolution was intent on avoiding
the heavy foreign ownership and perceived evils of Batista-era business activity.
With the support provided by aid and trade from the Soviet bloc, Cuba could
afford to exclude foreign capital.
But when this support disappeared after the fall of the Berlin Wall, Cuba faced a
deep economic crisis and in 1993 began to change some longstanding policies in
order to generate income and employment. This included cutting subsidies to
the state sector, encouraging family remittances from abroad by eliminating
penalties for holding foreign currency, allowing limited small business activity,
introducing incentive-based agricultural production and new farmers' markets,
and an opening to foreign investment. Together, these reforms have brought a
modest economic recovery and given many thousands of Cubans an opportunity
to work in a capitalist setting.
Who would have thought
that we, so doctrinaire, we
who fought foreign
investment , would one day
view foreign investment
as an urgent need?
—
FIDEL CASTRO
JULY 2.6, 1993, SANTIAGO, CUBA
This paper is based on over 70 interviews with participants and observers of the
foreign investment sector: workers, managers, officials, academics. (All the
worker interviews were conducted in private ; only one was done in the workplace.) It sketches the system and laws that govern foreign investment in Cuba,
reviews the experiences of Cuban workers and foreign investors, and describes
the economic context in which these investments operate. It does not discuss
expropriated property, an issue that has been prominent in U.S. legislative
debates. Many aspects of foreign investment in Cuba—managerial culture,
worker training, worker and investor incentives, environmental protection
—call for additional research.
Foreign investment is a delicate research topic to pursue in Cuba. Many foreign
executives are extremely wary of discussing their business, especially with an
American visitor. Added to a businessman 's natural reticence are a hesitancy to
risk offending Cuban partners, and a very high sensitivity to American sanctions
directed against the Cuban economy. Most of those interviewed preferred
anonymity. One European investor broke off an interview after a half hour of
pleasantries . "This is not a war zone, but it 's certainly a conflict zone," he said.
"There is no value in talking about our work here."
THE 1995 LAW
Atentativeopening to foreign investment in the early 1980's, mainly designed
to promote tourism , had by 1988 produced one joint venture, the Sol Palmeras
hotel at the Varadero beach resort east of Havana. This number grew in the
early 1990's as Cuba's needs grew more acute and its investment promotion
activities followed suit. In September 1995, a new Foreign Investment Act was
enacted to set the stage for even greater investments. "The fundamental objective
of foreign investment is technology and markets," President Castro said during
the National Assembly's discussion of that law.
The 1995 law has these principal features:
It is a selective opening to foreign investment. Cuban authorities plan the
fr
sectors where they want to attract foreign capital, then choose partners o
specific projects .
WORKERS7 EXPERIENCES
Hiring . Under Cuba's foreign investment law, workers in joint ventures are
hired and paid through state employment agencies such as ACOREC, the
Contracting Agency for Commercial Offices. Employers tell the agency the kind
of vacancies they need to fill, and candidates are provided for interviews.
To be considered for these jobs , Cuban workers must present themselves to the
employment agencies, show their interests and qualifications , and secure a place
on a list of pre-approved candidates that are presented to joint ventures when
vacancies occur. It also helps to search on one's own. "The immense majority
of workers get jobs through contact with the firm or by knowing someone in the
firm," one employee said.
Asked whether employment agencies constitute a filter that screens political
views, one employee of a joint venture responded, "Definitely." Most workers
said that the agencies verify their qualifications and ensure that candidates '
records reflect no "social problems ," a euphemism that could encompass
political activity . While it is clear that a black mark of any kind on one's record
is likely to disqualify a Cuban from a sought-after job , it bears noting that in
interviews conducted for this paper, employees of joint ventures who had
successfully passed through this screening process reflected the full range of
opinion on Cuban government policy.
u
y
t hotel employees said the local agency acts not as a
Near Varadero, off -d
political , but a geographic filter, discriminating in favor in favor of local
residents for resort jobs .
The Value of the Peso
Purchasing power is an elusive concept
in a place where housing is free and
most utilities are heavily subsidized;
where all citizens get some foodstuffs
from the government each month at
minimal cost, and the rest at market
prices; and where dollars and pesos
circulate freely, each serving its half
of a bifurcated economy.
But to place the figures in this paper
in context, the following may be
useful. The average monthly salary
in Cuba is 2 17 pesos. Pensioners
might receive 130 pesos, a specialized
physician 450. For the past two
years, the U.S. dollar has
consistently traded for about twenty
Cuban pesos. At farmers' markets,
about 34 pesos—fifteen percent of
the average salary—buys a pound
of pork chops, a pound of rice , and
apound of black beans. A
While Cuban law generally bars direct hiring by joint ventures, there are cases
where foreign managers have met Cubans outside of workplace settings and
recruited them for jobs . Interviews for this paper yielded four examples—two
junior managers, an office assistant, and a musician —where workers were
recruited by foreign executives, presented to the employment agencies by the
executives , and approved for hiring .
Compensation. Among foreign observers, employee compensation is perhaps
the most controversial aspect of foreign investment in Cuba. It is also among
the least understood.
An opinion article in the Washington Times in January 1999 claimed that "foreign
companies pay salaries in U.S. dollars to Mr. Castro and he in rum pays [workers]
in worthless Cuban pesos ." In September 1998, an independent journalist in
Cuba derided the "use of Cuban workers as cheap labor." A December 1998
letter to European parliamentarians from the Netherlands chapter of Pax Christi
claims that joint ventures ' salary payments are a "form of exploitation " and a
"human rights violation."
By contrast, another independent journalist reported in January 1999 that
Cubans who work for foreign investors enjoy good meals and snacks in the
workplace, and if they perform well they receive a monthly basket of household
goods and a small pay supplement in dollars. Workers in the state sector
receive none of these benefits, he wrote, and exceptional performance brings
them only a "pretty diploma."
In fact, the system works as follows:
Joint ventures pay the agencies in dollars.
Workers receive salaries in pesos from the state employment agencies.
• For this transaction , the "official " rate of one peso to the U.S. dollar is used,
even though pesos have traded stably at about twenty to the dollar for over
two years.
Therefore, to pay a worker a 300-peso salary (the equivalent of $15), the joint
venture must pay the employment agency about $450, to cover salary, social
security and labor taxes.
The result is that the worker 's 300-peso salary is slightly above the average
Cuban salary of 217 pesos. But at real exchange rates, the joint venture paid
about thirty times that amount.
Cuban officials are unapologetic about this arrangement; they are collecting
taxes to provide social benefits for workers who no longer provide labor to the
state. Joint venture executives are not enamored with this system but seem to
accept it as a very unusual labor tax, another cost of doing business. One execui tve points out that as a result of this system, lower-skilled labor is relatively
expensive in Cuba compared to nearby markets, but "even with the 95% tax, it
is not expensive to hire professionals in Cuba, because they are so good."
Interviews with workers and executives show that in addition to the salaries
paid through the employment agencies, there are other forms of compensation
that lift workers in the foreign investment sector far above their peers in the rest
of the Cuban labor market.
First, there is the "jaba ," the basket of goods that is widespread in the foreign
investment sector, and increasingly in the state sector. Typically, these contain
toothpaste, detergent, and other household goods that might be difficult to
purchase for pesos.
Second, there are widespread cash payments made directly to workers.
Examples from interviews:
A cleaning woman at the Bella Costa Hotel in Varadero earns a monthly
salary of 267 pesos, a "jaba ," a $4 cash supplement, and a share of tips that
usually amounts to $10. The dollar payments are worth 280 pesos, more
than the average Cuban salary of 217 pesos.
A junior manager for a Canadian company earns 300 pesos plus $100 each month.
A sales representative for an industrial equipment manufacturer earns 300
pesos monthly plus a side payment of $300.
An executive in Havana pays his sixty employees a supplement of about $60
each month in the form of a $3 daily lunch stipend .
Workers at the "all-inclusive" Superclubs resort in Varadero say they receive
$40 pay supplement each month.
Interviews with resident observers of the Cuban economy, both Cuban and
foreign, confirm that these cases are not aberrations .
"The great majority of Cuban workers in joint ventures receive part of their salary
directly, in dollars," one Cuban analyst explained . "It's not exactly in conformity
with the law, but it's done everywhere. And it explains why there is an enormous
i ed people from the universities and the professions, to go
flight of well qualif
work o
fr higher pay in this sector, in jobs for which they are overqualified ."
Said another analyst: "These workers all get some money outside their regular
salary, they get transportation and food. If they didn't get this, they would not
work. These benefits are generally based on the employee 's conduct, his
r
a getting more productivity
productivity and his attendance . This is why wee
than we have ever got in these sectors."
Adiplomatfrom a country with substantial investment in Cuba agrees: "Foreign
managers quickly found out that if they wanted employee productivity , they
needed to provide incentives , either aboveboard or under the table." He says his
embassy makes supplemental payments of $300-$400 per month to each of its
Cuban employees.
"Each company has a different philosophy and approach
o t paying workers
under the table. It depends who you are doing business with," said one
European executive , referring to the Cuban partner in each joint venture. "It can
be $20 or $10 per month, or it can be that much in food, or it can be a cash bonus
for on-time completion of a job ."
One foreign executive often employs temporary crews for short-term jobs , and
gives these contract workers packages to take home. "We give our workers
breakfast, lunch, and dinner, and two snacks a day," he says. "Then, at the end
of the day/ they get a package with a can of soda or beer, a can of meat, a can of
beans... It's not a lot, but we'r
supplementing their income in a way that
e
makes a big difference in their lives." Another executive reached the end of a
short job with a contracted crew and paid cash bonuses on the spot. "We
caught grief for it," he said, "but it was the only way we could compensate
them. We were never going to see this crew again."
How much investment 7
Precise numbers describing the
amount of investment in Cuba are
hard to come by. In part, this is by
design. Cuban officials say that as
aresult of the Helms-Burton law,
they will not go beyond issuing a
figure of $2.2 billion in investments
from 1988 to 1995. Also, some
sources seem to combine investments
with intentions, such as those
announced in the publicity that
surrounds Cuba's aggressive
promotional campaigns (for example,
the U.S.-Cuba Trade and Economic
Council estimates $6.1 billion in
"announced" investments, with no
tm
i e frame specified ).
Investments of $2.2 billion may be
small in comparison to investment in
other countries—for example, it roughly
equates with the combined sums spent
since 1997 by AT&T and MCI to build
their affiliates' long distance phone
networks in Mexico alone.
But after decades of investment
drought,the first drops of new
investment in Cuba in the past
The supplemental payments described above are not envisioned in Cuba's foreign
investment law. As a result they are either illegal but tolerated , or they are in
the "neither illegal nor legal " category that has encompassed many kinds of
economic activity since Cuba's economy began to change in the 1990's.
However, there is no legal ambiguity to pay supplements made in the nickel
mining town of Moa, where a shift manager at the Pedro Soto Alba plant (part
of a joint venture with Canada's Sherritt International ) earns 460 pesos monthly,
plus a salary supplement that averages $70 each month. A boiler operator at the
same plant earns 320 pesos, plus about $60 each month. Sherritt executive
Patrice Merrin-Best explains: "The actual operating terms of our joint venture
agreement include a precise formula by which 'stimulation ' payments
[estimnlos, or incentive payments] are derived . They are based on productivity,
the reliability of the facility, and the volume of output; they are paid evenmonth at mid-month in everyone's pay packet, in dollars, and they range from
10-22 percent of the peso wage." (E .g. a 300-peso salary would be accompanied
by a dollar payment of $30-$66.)
Athirdtype of supplemental pay is provided in the foreign investment law:
profit sharing. The law permits joint ventures to place a percentage of profits in
afund (fondo de estimnio) for distribution to workers.
This is being done at the national phone company ETECSA, where an operator
saw her basic monthly salary increase from 138 to 200 pesos when the Italian
telecom company STET entered this joint venture. In addition, since August
1998, she has been receiving a cash supplement of $10 monthly. Her lowerranking co-workers get $3, her shift chief gets S16. This profit distribution , which
doubles her pay, is contingent on a good attendance record and performance,
and she believes that her hard work and irregular hours merit the higher pay.
"They demand a lot from us. But this is a big improvement," she says. "We're
privileged compared to others," such as health c
a
r
e and education workers with
no access to dollars, she adds.
At another joint venture, the profit sharing caused difficulty . When this small
industrial company's fund accrued a balance of 85/000 pesos , the foreign executive
was ready to distribute money to the workers, and he held a meeting with his
Cuban partners to decide how and when to make the payments. They balked .
The concept was clearly legal, but it conflicted with their egalitarian principles ,
and they could not accept that workers in the joint venture would earn a bonus
while workers in their own ministry would earn none. For his part, the foreign
executive could not accept that a share of profits would accumulate indefinitely
in a special fund for no purpose. The discussion deadlocked , reconvened, and
deadlocked several more times . In the end, the solution was in-kind profit
sharing. The company rented houses at Varadero, and sent workers and their
families on vacations . Funds remained , so all employees received free dental
examinations and treatments . Funds stil remained , so all were given free eye
examinations . And with that, the fund was nearly depleted, and began to
accumulate profits once again.
Market experience. While it is impossible to quantify the impact that recent
foreign investment may have brought
o t the Cuban workplace, it is clear that
significant change has occurred.
Many, if not all, of the approximately 60,000 Cuban workers in joint ventures are
earning higher pay, and like their counterparts in other parts of Cuba's new economy—small business and incentive -based agriculture—their pay is e
itd to output.
decade have had a considerable,
and very visible impact. One
Cuban economist notes that foreign
capital is involved in all of the businesses in the following sectors: oil
exploration, metals mining, wireless
and wireline telephony, rum exports,
soap and perfume, and lubricant
production;and in half or more of
the business in the nickel, cement,
and principal agribusiness sectors
outside of sugar and tobacco . A
Joint ventures in Cuba with
Foreign Capital
TOTALS
BY COUNTRY
1992
1994
1995
1997
1998
Spain ...... 70
Canada ..66
Italy ........ 52
UK .......... 15
France .... 14
......35
...... 180
......2 12
......3 17
......345
BY SECTOR
Mining, oil, heavy industry ...... 88
Tourism .................................. 58
Light industry .......................... 30
Food processing ...................... 24
Agriculture .............................. 17
Moreover, glimpses of individual workers ' experiences indicate that, while they
are not working in the economic or legal setting of a full-fledged market economy, neither are they working in the socialist Cuban economy of a decade ago.
They are learning about markets. Examples:
After a decade working as a construction engineer for the state, a sales representative expresses satisfaction at his sense of responsibility, and at the
possibility that he can earn commissions if his efforts bring results. He spends
most of his time on the road, developing sales leads for his foreign employer.
An office manager for a small industrial company often works alone, acting
as the day-to-day link between the home office overseas and its operations in
Cuba. "I have learned many things in this job — to be more efficient, to do
many things at the same time, to have a greater capacity for work," she says.
"It has done a o
lot t perfect my English. I'm becoming a bit of a lawyer,
sometimes I work with contracts and analyze all their provisions ."
Another office manager, a former mechanic, is working for the first time with
computers, learning how to manage inventory in a large organization. He
marvels at the "transparent " way his Canadian employers work, and at their
long-range planning . "On the day I started working for the Canadians, I
realized I didn't know how to work," he says.
A phone company worker says that when Italian managers entered the
company, there was a change toward "greater promptness, greater quality,
better customer service, and higher pay." "There is quality control, they
check on our service, on the speed of repairs," she says. "We Cubans are
used to disorder, now Cubans who come into our company are shocked at
the way we work. It 's the other way around, too—when we go into a store
and the clerk doesn 't attend to customers, we get very annoyed."
Another phone company worker comments: "It would be better to have
people be paid according
o t their work, but that would be a different kind
of system."
• A young professional says he receives dollar pay supplements each month
from his foreign employer, but is wary of discussing them. He explains the
system indirectly: "\have value as a professional to them, and they invest in
resolving all the problems that could affect me and my family and my work.
The pay is much better here, they give you what you need so that when you
are at the office, your time is much more valuable to them. And the conditions are very good... if I need a camera, it appears, if I need to go to
Santiago, I go."
Across the board, workers in joint ventures noted that they have superior
equipment and technology in their workplaces .
INVESTORS7 EXPERIENCES
Interviews with investors indicated diverse motivations for being in Cuba, a
general sense that the business climate is improving with time, and confidence
in the long-term future of the market.
Some companies are clearly in Cuba for current profits; some because "the
Americans aren't here"
o t compete, according to one Canadian; others are
gaining a foothold in a market that is expected to grow significantly if greater
market reforms are adopted or the U.S. embargo is lifted . "Someday, this
country is going to buy a lot of buses," one investor says.
Economics 101, Version 2.0
Management,finance, and marketing at the University of Havana?
"We were not unaware of these
subjects," says Lourdes Tabares, a
vice-rector at the historic hilltop
university. "But as our economy
changes,we have to change too."
The change she engineered was to
complement the government's economic policy reforms by renewing
the university's economics curriculum. An agreement was reached
with Canada's Carleton University,
and with Canadian government
development assistance funding, a
five-year program was launched.
In the words of the Canadian
co-director, Carleton economics
professor Archibald Ritter, the mission was "to jump-start the teaching
of market economics in Cuba."
For five years, Carleton professors
have traveled to Cuba to give onemonth courses in the theory of
microeconomics and macroeconomics, international economics,
Personnel. Investors offered uniform praise for Cuban personnel . Asked
about business conditions in Cuba, they all noted the high level of education of
the workforce. Sergio Meisler noted that his farm employees have at least twelve
years of education—"You don 't find that anywhere else," he says, and he
attributes their ability to leam new techniques to their academic preparation .
Education aside, Cuban personnel are not always adapted to the tasks foreign
investors need them to perform.
"It's hard to get good people with business acumen," one U.K. investor says.
"It's best to get young people under 30, who are adaptable, or people over 60
who may remember what things were like before."
"The problem is if you are looking for marketing or sales people," a European
says. "The candidates are all from the University of Havana, they are good people with important credentials, but they 're not what we need . They don 't have a
system of motivation by commissions, which is what makes a sales force work."
"What's missing is a culture of management, a knowledge of how to get
things done, how decisions are made and transferred," another executive
says. "There are people who have never made a decision or been held
accountable for one. They don't know the concept of a win-win negotiation.
And many Cubans believe that if a person makes one mistake they should be
punished rather than shown how to do it right next time. We do a lot of
on-the-job training in our business."
Bureaucracy and business conditions . Interviews with investors and officials
seem to indicate that Cuba's day-to-day practices toward foreign investors are
shaped by three factors: a government bureaucracy, a lack of experience in dealing
with customer demands of a foreign business community, and the socialist
government's highly enterprising effort to maximize its opportunities to draw hard
currency from foreigners. Foreign businesses seem to make the case for more
streamlined and inexpensive processes as cases arise, and individually.
Examples:
• Retail stores available to foreign businesses and diplomats used a paperheavy system where customers placed purchased orders and returned for
merchandise at a later date. One executive was pleased that the system
changed and allowed her to buy a scanner off the shelf in one of these stores.
"The idea of going in with cash and walking out with your purchase was a
big step/' she said.
In one joint venture, the Cuban partner resisted the idea of marking up the
price of goods and services that were destined for a Cuban state customer.
The foreign partner argued that the business would not run if goods were
sold at purchase price, and he prevailed .
Some investors complained of surprise costs: building insurance charges on
top of office rent; non-deductibility of meal expenses in private restaurants;
semiannual $60 charges
o t renew multiple entry visas.
On the positive side, two major investors asserted that "the rules of the game
are clear/' although they may take time to learn. None of those interviewed
raised instances of corruption .
public finance—all aspects of
"mainstream conventional economics/'
as Ritter describes it—and they are
joined by Latin American professors,
often from the UN's Economic
Commission on Latin America . In
all courses, a Cuban professor
works aside the foreign instructor to
learn how to teach the course. The
program is "extremely hard," one
graduate said; "Carleton's program
has very rigid requirements, it
requires a lot of work from the
students,and much of the material
was in English." This graduate now
works in the private sector as an
investment analyst.
Cuban students have earned three
Ph.D.'s and 80 Masters of Arts in
Economics from Carleton. Some
are working in ministries, banks
and [oint ventures;others are
teaching the new economics in
Havana, Santiago, Matanzas,
Camaguey, and Villa Clara.
"We have succeeded," says Ritter.
"This the university is a center of
development,we have to respond
ot
the needs of the country," says
Tabares. A
THE FUTURE
Foreign investment "has been positive from any point of view," a
Cuban economist says. "It has changed the way of doing business, it is
o t permeate the Cuban
bringing greater efficiency, and it has begun
business mentality."
But if these changes, added to the social welfare value of vastly increased
worker incomes, constitute clear benefits for the Cuban economy, the benefits
are tempered by the limitations the Cuban government places on the scope of
investment. For example, in many sectors foreign investment is expanding and
modernizing sendees, but there is no competition to maximize efficiency and to
drive prices down. In this sense, the foreign investment opening resembles
Cuba's small business and agricultural reforms. It has opened the door to
changes that have important welfare benefits and are dramatic when compared
to the economy of ten years ago, but they fall short of their potential .
In the coming years, it is far more likely that Cuba will marginally adjust its
laws and policies affecting foreign investment rather than change them radically
in either direction . Areas of possible change include a new real estate law that
could allow foreign nationals to own, rent, buy, sell, and bequeath real property ;
and an enterprise reform that could create smaller, more independent state
enterprises , or allow today's microenterprises to grow into more substantial
small businesses .