Cuba’s expropriation of foreign investments and facilities generated a diplomatic and legal furor that led businesses to demand increased investment guarantees when they operated in developing nations.
Cuba’s nationalization of foreign investments reflected a popular trend among developing countries in the 1960’s. Nationalization involved the expropriation, or takeover, of private foreign investments for the public good. It involved a search for a balance between the efforts of developing nations
The emergence of Fidel Castro as the leader of Cuba in January, 1959, marked the beginning of an ideological change that altered the political economy, particularly in relation to the rights and responsibilities of foreign firms and investors in Cuba. Castro came to power determined to put into practice his revolutionary idealism. Castro, by nationalizing targeted foreign factories and businesses, hoped to return to Cubans the control of the core and cardinal sectors of the national economy.
Castro’s actions were not devoid of ideological motives. The Cuban leader, after a brief career as a lawyer, entered visibility in national politics when, on July 26, 1953, he led a mob of more than one hundred activists in an attack on barracks and other facilities in Santiago de Cuba. After one and one-half years of a fifteen-year prison term, he was granted amnesty by Fulgencio Batista y Zaldívar’s government. On January 1, 1959, Castro and his revolutionary brigade forced Batista into exile. The reins of power passed to a fiercely ideological group.
Within weeks of assuming power, Castro announced that his government intended to dispossess those he described as the unlawful beneficiaries of the national wealth. The criminals, as he termed them, included the ousted Batista, his officials, and foreign concessionaires suspected of unlawful enrichment in collaboration with the defunct administration. Cuba’s Fundamental Law
The government’s perception of the role and place of foreign investors in Cuba was heavily conditioned by a socialist bias. On June 3, 1959, Cuba launched the Agrarian Reform Law,
Cuba’s revolution also took aim at land tenure in the mining industry. A creeping expropriation indirectly forced investors to relinquish proprietary interests as soon as it became unprofitable to continue in business. On October 26, 1959, the government introduced changes in the tax scale for nickel and other mining concessions, which were largely held by foreign firms. Mining Law No. 617
The government sought to enhance its revenue and economic control in other ways. On May 17, 1960, the governors of the central bank, Banco Nacional de Cuba
The test of good faith in the nationalization policy rested on the payment of compensation to the dispossessed investors. Although the Cuban government agreed to compensate foreign investors, the amount of compensation, which seemed sufficient by Cuban measures, was not adequate according to the owners’ valuation of present and anticipated returns on capital. The standard of compensation established by Cuba, based on unstable rates of foreign exchange, meant the loss of substantial revenue to firms. The basis of good faith appeared to be absent, given the ideological thrust of Castro’s regime. The government appeared to desire a transfer of wealth rather than a businesslike takeover of control.
The U.S. Congress moved to protect the interests of American investors. On July 6, 1960, the legislature amended the Sugar Act
American investors were caught in the middle of the confrontation. Castro’s government, by an executive resolution of August 6, 1960, nationalized more than two dozen firms in which Americans had controlling stock or substantial equity. Cuba contended that U.S. regulation of the sugar trade encroached on its sovereign rights and followed up with a string of legislative and executive instruments, including a stipulation that compensation to U.S. investors would be paid from revenue realized from U.S. sugar imports. Cuba, unhindered by the numerous protests, continued to nationalize banks and other U.S. firms.
Cuba’s economic nationalism
Cuba’s actions were not the first of their kind in international business. Since World War II, nationalizations have occurred in Africa, Asia, Europe, Latin America, and the Middle East. In 1977, the U.S. Comptroller General reported to Congress that between 1961 and 1975, 260 major expropriation disputes involving U.S. private investments had occurred in different parts of the world: 30 in Asia, 37 in the Middle East, 75 in Africa, and 118 in Latin America.
Cuba’s economic nationalism turned the attention of policy makers to foreign expropriations. By the Johnson-Bridges Amendment
Congress acknowledged the right of a developing nation, in exercise of its sovereign privilege, to appropriate property within its territory but stipulated that such privilege carried a responsibility for the fair treatment of aliens. Foreign expropriation became a substantive issue when Leonel Brizola
In a bid to counter the excessive application of sovereign privilege to business transactions, Congress amended the Foreign Assistance Act of 1961 to afford protection to U.S. investors abroad. Under the amendment sponsored by Senator Bourke B. Hickenlooper, the willful abrogation or impairment by a foreign government of its contractual obligation to a U.S. firm was sanctionable by the suspension of economic aid until a satisfactory settlement was reached. In the case of Cuba, Congress in 1962 amended the Foreign Aid Appropriation Act
The Cuban expropriations led to reexamination of the international and domestic law principles governing the acts of sovereigns. The matter arose from the implementation of Cuba’s Law No. 851, under which Castro nationalized the Compania Azucarera Vertientes-Camaguey de Cuba
Congress, dissatisfied with the decision of the Supreme Court, responded with an amendment to the Foreign Assistance Act
Foreign expropriations also led to institutional arrangements for the management of investment disputes. In 1969, Congress established the Overseas Private Investment Corporation
The disputes made for greater business-government cooperation. President Richard M. Nixon’s economic assistance and investment security policy of January 19, 1970,
Business response to expropriation varied. It included contract revision, litigation, appeal to diplomatic quarters, and relocation of investment. In 1976, the European Organization for Economic Cooperation and Development
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Akinsanya, Adeoye A. The Expropriation of Multinational Property in the Third World. New York: Praeger, 1980. Makes a forceful argument for the position taken by some of the developing nations in their efforts to gain or regain control of their national economies. -
Blanchard, Daniel S. “The Threat of U.S. Private Investment in Latin America.” Journal of International Law and Economics 5 (1971): 221-237. Illustrates developing nations’ perception of foreign capital and presence as a neocolonial threat. -
Figueras, Miguel Alejandro. “Globalization, the Multilateral Agreement on Investment and Nationalization in Cuba.” In Globalization and Third World Socialism: Cuba and Vietnam, edited by Claes Brundenius and John Weeks. New York: Palgrave, 2001. Study of the expropriation of foreign property in Cuba in the context of the globalization of industry and the development of the international economy. Bibliographic references and index. -
Kaufman, Burton I. Trade and Aid: Eisenhower’s Foreign Economic Policy, 1953-1961. Baltimore: Johns Hopkins University Press, 1962. A forceful analysis of the politics of trade and aid in the period preceding the reform of foreign assistance in 1961. -
Lipson, Charles H. “Corporate Preferences and Public Policies: Foreign Aid Sanctions and Investment Protection.” World Politics 28 (1976): 396-421. Illuminates the convergence and departure of purposes between the private and public sectors. -
Todaro, Michael. Economic Development in the Third World. 4th ed. New York: Longman, 1989. Examines the problems of dependence and economic development in developing areas, particularly in terms of patterns of and approaches to industrial reform. -
Vernon, Raymond. Exploring the Global Economy: Emerging Issues in Trade and Investment. Lanham, Md.: University Press of America, 1985. Perspectives on the configuration of the global economy and what appear to be conflicting expectations of the developing and the developed countries. -
Waldman, Raymond J. Regulating International Business Through Codes of Conduct. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1980. Interesting discussion of attempts to make firms more responsive and responsible in the international environment.
Cuban Revolution
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