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Cuba and Iran are Promising Potential Markets but Businesses will have to Overcome Various Hurdles

By: Lan Ha

    The restoration of the Cuba-US relationship in 2015 and the removal of some western economic sanctions on Iran in early 2016 will boost investment, trade and consumption in the two countries.

    However, businesses seeking to gain a foothold in these two potential markets still have to cope with significant hurdles including heavy state interference in the economy, corruption and relatively high tax rates, although a relatively well-educated workforce represents an advantage for both countries.

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    Source: Euromonitor International from national statistics/UN

    Note: Data are in US$, year-on-year exchange rates

    • With a total population of 11.4 million people and a growing demand for consumption, Cuba offers a promising potential market for businesses, especially as Cuban consumers have had little access to global products and services for more than 50 years since the imposition of the US trade embargo in 1960. A lack of infrastructure and a difficult business environment, however, remain major problems for doing business in Cuba;
    • Iran is the second largest consumer market in the Middle East in terms of total population (79.1 million in 2015). As most of the Western economic sanctions were lifted in early 2016, Iran is expected to see faster economic growth in the coming years, while restored access to international investment and finance will help to boost industrial development and employment. However, the government’s measures to improve Iran’s business climate have been sluggish.

    Implications

    Cuba’s and Iran’s business environments are considered to be among the most difficult in the world:

    • The Cuban economic system is still largely repressed, as it ranked 177th out of 178 countries in the Heritage Foundation’s Economic Freedom Index in 2016, just above North Korea. The economy is dominated by state-owned companies, and a poor regulatory framework results in inefficiency and non-transparency on the market. The state maintains strict controls on the labour as well as financial markets;
    • Iran ranked 171 st out of 178 countries in the 2016 Economic Freedom Index, and was positioned 118th out of 189 countries in the World Bank’s Ease of Doing Business 2016 rankings. State interference is heavy in many areas including foreign investment and credit allocation. The private sector, therefore, remains largely marginalised;
    • Corruption is a pervasive problem in both Cuba and Iran, given the domination of the state-run sector and the lack of accountability for government actions. In the Transparency International’s Corruptions Perception Index 2015, Cuba and Iran ranked 56th and 130th out of 168 countries respectively;

    Freedom and Corruption Perceptions Rankings for Cuba, Iran and Selected Countries: 2015 and 2016

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    Source: Euromonitor International from The Heritage Foundation/Transparency International

    Note: (1) The Economic Freedom Index is based on 10 quantitative and qualitative factors of economic freedom: property rights; freedom from corruption; fiscal freedom; government spending; business freedom; labour freedom; monetary freedom; trade freedom; investment freedom; financial freedom. (2) Corruption Perceptions Index relates to perceptions of the degree of corruption as seen by business people and country analysts.

    • As of 2016, the standard corporate income tax rate is 30.0% in Cuba and 25.0% in Iran. These are higher than most other countries in Latin America and the Middle East regions. For example, Chile’s corporate tax rate is 24.0% and Jordan’s is 20.0%.

    Nevertheless, both Cuba and Iran have relatively well-educated workforces:

    • In 2015, the adult literacy rate was 99.8% and 86.8% of the population aged 15+ in Cuba and Iran respectively, higher than Latin America’s and the Middle East and Africa’s average of 93.5% and 70.2% respectively;
    • However, Cuba and Iran still have to compete with other countries in their regions in terms of labour cost. Cuba’s wage in manufacturing stood at CUC3.0 (US$3.0) per hour in 2015, compared to US$2.5 in Brazil. In Iran, the minimum wage was IRR6.1 million (UUS$210) per month in 2015, higher than US$157 in Egypt and US$179 in Algeria.

    Prospects

    • Much of Cuba’s potential for investors and businesses will depend on the reforms that Cuba would undertake to become a free market economy and the USA’s decision to fully lift its trade embargo with Cuba. Cuba’s 2014 foreign investment law already allows wholly owned foreign enterprises, but thus far they are all joint ventures with the government. The Cuban economy is forecast to grow by 3.9% in 2016, slightly down from 4.0% in 2015;
    • In Iran, privatisation and reduction of bureaucracy will continue to be critical for improving the country’s business environment. Thanks to the removal of economic sanctions, the Iranian economy is expected to grow robustly by 4.0% in 2016, up from 2.0% in 2015. Its sizeable market with youthful consumers (51.1% of the population aged under 30 in 2015) offers great growth potential for consumer goods companies.

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