Introduction
At the end of the Cold War, the Soviet economy imploded which also gravely damaged the Cuban economy. In the Special Period that followed, the Cuban government sought ways to improve the vitality of the Cuban economy. As the economy continued to deteriorate, attaining economic security became the chief concern for the Cuban government because the moribund economy undermined the economic viability of the Revolution. Therefore, in order to safeguard the sacred tenets of the Revolution—national sovereignty and los logros—the government suited the Fuerzas Armadas Revolucionarios with the task of improving the economy. To prepare for this task, high-ranking FAR officials learned and mastered the models and techniques of Western business management and organization. While the FAR gained more success and earned a greater role in shaping the countries economic affairs, so too did its share of political power. The rise of Raul Castro further solidified the FAR’s power and influence in Cuba since his power is vested in the FAR. Over the years, the FAR has concentrated its hold over the economic and political apparatuses of the country. This has produced some troubling consequences that include corruption and rent seeking behavior. The militarization of Cuba’s political economy may produce some troubling market distortions and negative externalities, and it will likely continue in the foreseeable future. The elites who sustain this political economy will likely build a consensus with the nation centered on economic growth and political stability as a means to justify their own power. Ultimately, the elites of Cuba in the 21st century are primarily concerned with safeguarding their privileges and securing regime continuity.
The Special Period
During the Cold War, the Cuban government enjoyed special trade and economic privileges with the Soviet Union due to its ideological affiliation with Moscow. Previously, the Cubans enjoyed generous fixed prices for its exports, subsidies on its imports as well as subsidies on consumable goods, inputs for manufactures and lax financial lending agreements. Cuba’s economy was especially dependent on the sugar-for-oil program, which improved the terms of trade for preferentially priced sugar in exchange for heavily subsidized oil. The Soviets also sustained the Cuban economy with fresh flows of investment, endowments of capital inputs, and food to meet the needs of sustaining the Revolution. While this privileged relationship with the Soviet Union remained firmly intact, the Cubans had little incentive to restructure their economy. However, once the Soviet Union and the Comecon trade system collapsed, the Cubans suddenly lost their salient sponsor and were forced to use their own ingenuity to persevere one of the worst crises yet to challenge the Revolution’s sustainability.
In a speech in 1990, Fidel Castro defined the impending economic decline and languid era by stating that Cuba was entering a “special period in a time of peace.” During the Special Period, Cuba suffered from its worst external shock in recent history. Labor productivity—particularly in energy dependent sectors—tanked from a decline in subsidized inputs such as fuel, technology and capital. As a result of this and from a sharp reduction in trade, the GDP plummeted somewhere between 35 and 50 percent. The crisis left an indelible impact on the country’s civilian population. At its apex, there were acute shortages of foreign exchange and basic goods such food, fuel, electricity, water and medicine. US efforts in 1992 to deliver a coup de grace to the Castro regime by increasingly strangling the economy with harsher Embargo statutes further exacerbated the intensity of the crisis.
During the Special Period, economic insecurity became one of the primary concerns for the regime. In an attempt to increase efficiency and productivity, the government abruptly instituted a series of emergency market oriented reforms that would have been deemed heretical just a few years earlier. In October 1992 the Fourth Congress of the Partido Communista de Cuba proliferated a document that encapsulated the new policy outline. The 18 points, which contain a combination of “liberalizing and state led” elements, were enacted in order to ensure the survival of the regime and to defend two sacrosanct principles associated with the Revolution: national sovereignty and “los logros—the accomplishments in health, education, social equality and full employment.” Therefore, moderate liberalization of the economy was merely a pragmatic means to sustain the Revolution; it was never intended to be an end in of itself. Nevertheless, the government enacted a series of reforms related to employment, private business, and agricultural production. And, as it turns out, the institution within the Cuban government that was in the forefront of promoting these reforms was the Fuerzas Armadas Revolucionarios (FAR).
A New Mission and a New Model: Perfeccionamiento Empresarial
Due to the lack of a functioning civil society or a free entrepreneurial class in Cuban society that would be capable of undertaking such a tremendous burden, the responsibility of managing the economy naturally gravitated toward the only institution that was equally considered both competent and loyal: the FAR. After the onset of the Special Period, the FAR’s chief responsibility, in addition to maintaining national defense, was to respond to the economic exigencies that challenged the sustainability of the Revolution—though Raul’s assertion that “beans are more important than cannons” more thoroughly highlights where the FAR’s strategic lens was primarily focused.
In preparation for such a grand undertaking, Raul had already started sending high-ranking military leaders to business schools in Western Europe, Latin America and Asia during the late 80s and 90s in order to acquire knowledge in management and business techniques. Many of the pragmatic ideas within these soldiers’ business curriculum inherently undermined many of the inefficient production practices and resource allocations associated with Cuba’s Soviet style command economy. For example, in Peter Drucker’s Management: Tasks, Responsibilities, Practices, Drucker asserts that a “manager has to not only improve what already exists, but he also has to be an entrepreneur; he has to redirect resources from areas of low or diminishing results to areas of high or increasing results.” In contrast to their hard line Marxist comrades in the PCC, these officers—heavily steeped in the language and mathematics of Capitalism—were being transformed into pragmatic “technocrat-soldiers.” After internalizing these pragmatic business methodologies, the officers returned to Cuba ready to implement a new economic model entitled el sistema de perfeccionamiento empresarial (SPE) for the benefit of the Cuban economy. Overall, the system sought to enhance the self-dependence of the FAR, diminish its reliance on the Soviet Union, improve productivity and efficiency in military industries producing military equipment and consumable goods, and, most importantly, to bequeath an effective paradigm that could be utilized throughout the Cuban economy. Using business parlance reminiscent to Peter Drucker’s teachings, the late General Julio Casas Reguiero—a former deputy minister of MINIFAR in charge of economic affairs as well as the former chief of Cuba’s largest state business conglomerate (GAE SA)—asserted that one of the principal goals of the SPE was to apply “market mechanisms” and “new technical and entrepreneurial solutions to [solve] old problems.”
While the need to abandon the inefficient Soviet style command economy was fairly evident, Fidel, and many other high-ranking socialist ideologues in his inner circle, were still reluctant to unconditionally accept the new SPE paradigm as part of a new development strategy. However, soon the FAR had ample opportunities to test and prove the value of its new economic model in prodding the moribund Cuban economy back into a state of productivity. Using the SPE, the FAR was expected to apply its managerial skills to the agricultural sector in order to boost output and provide food for its own troops. The FAR’s agricultural operation was so successful that it not only made the FAR increasingly more self-sufficient, but it also produced surplus output for sale in local agricultural markets. These gains in self-sufficiency would eventually allow the military to pay for 50 percent of its own operational costs with money earned from its own production of goods and services. To further prove the worthiness of the new system, the FAR was given permission to test the SPE model on one of the largest industrial conglomerates—the Military Industrial Union (UIM). With the supervision of Division General Julio Casas Reguiero, an assortment of experts affiliated with the Grupo de Perfeccionamiento Empresarial began to employ managerial reforms and changes in production methods in the factory. Since the outcome proved to be so successful, the SPE paradigm was universally applied to the rest of the Military Industrial Union’s 230 industries, which engage in biotechnology, sugar production, pharmaceuticals, the production of military hardware and consumable goods. In the following years, the majority of these factories have vastly boosted their output and profitability. The success of this model led to its adoption throughout all of the large state owned enterprises—especially those firms, such as tourism and natural resource industries, with an immense foreign exchange earning potential. Consequently, the prestige and power of the FAR soared as a result of its increased participation and success in the economy.
Curtailment in the Late 90s
Fidel and his loyalists viewed the reforms of the Special Period as mere emergency measures. They were always suspicious of the reforms and thought they were undermining revolutionary ethics and the social achievements of the revolution. Throughout the Special Period, Fidel tenuously vacillated between pragmatic officer corps and anti-market ideologues operating within the upper echelons of the PCC—though he tended to side with the latter during critical moments. With the support of Venezuelan oil subsidies buoying the economy, Fidel believed the Revolution could afford to turn its back on the economic reforms of the Special Period.
Raulismo: Reforms Under Raul Castro
In 2006, the year the ailing Fidel Castro partially ceded the reigns of power to his brother Raul, the GDP growth rate had reached the peak of a business cycle: 12.1 percent. Since 2006, the Cuban economy sharply contracted to a growth rate of 1.4 percent by 2009. According to the CIA World Factbook, it now obstinately rests at 1.3 percent. Fidel’s curtailment of the Special Period’s liberalization, it seems, not only lacked the prescience to foresee another looming economic crisis, but also failed to acknowledge the economic limitations of socialism under a command economy. The advent of a fresh economic crisis, required a swift change in strategy. There were now no doubts. Under the leadership of Raul Castro, reform is seen as an inescapable necessity. “Either we reform,” proclaimed Raul in the National Assembly in 2010, “or we sink.” Ultimately, this Raulista coalition seeks to embrace and formally enact a series of structural changes because its political legitimacy and regime survival depends on attaining long run economic prosperity and sustainability. Now, according to Raul, there will be no more backtracking: the “updates” will occur “sin prisa pero sin pausa.” In order to build a like-minded consensus of pragmatic reformers to back this process of actualizacion, Raul replaced all of Fidel’s close aids and personal advisors with Raulistas—mostly technocrats and business elites from the military. The power of the FAR, an institution that has long been inextricably linked with Raul, and the pragmatic officer corps is now more entrenched then ever.
The Militarization of Cuba’s Political Economy
The military’s involvement and influence in the economy continued to grow from the 1990s to the present. The implementation of the SPE has vastly increased the FAR’s concentration of economic and political power in Cuba. At present, analysts predict that the military controls up to 60 percent of the island nation’s total economy. The power of the FAR is further highlighted by how large their aggregate activity is to the economy: “89 percent of exports, 59 percent of tourism revenue, and 69 percent of hard currency wholesale transactions to name a few. A brief list of some of the industries and organizations under FAR’s managerial sway gives one a true idea to the almost ubiquitous extent of their economic clout. These industries and institutions include various governmental ministries—such as the Ministry of the Sugar Industry, the Ministry of Transport and Ports, the Ministry of Fisheries and Merchant Marines—special development zones such as the Mariel port, as well as a variety of SOE’s like the Cuban Civil Aviation Corporation, the Metropolitan Bank, Habanos SA (a cigar industry) and Gaviota SA (Cuba’s enormous tourist conglomerate) just to name a few more. In general, any large-scale joint venture endowed with foreign capital inevitably involves dealing with a military managed state owned conglomerate.
Nowadays, the political sway of the FAR is so vast that some commentators refer to the Cuban military as a “state within a state.” In addition to its domination of economic institutions and enterprises, military generals also coopted many of the primary civilian political institutions of the central government including the Politburo of the PCC, the State Council and the Council of Ministers. As a result, every aspect of policymaking in Cuba bears the influence of the FAR. Indeed, the FAR also enjoys a large degree of political independence in economic activity that can be corroborated by an ex-Canadian ambassador who now provides consulting services for foreign enterprises operating in Cuba. According to Mark Entwistle, the FAR can circumvent the inhibiting bureaucratic framework that hinders most other enterprises from doing business. For example, while trying to open a soybean operation in Cuba, he hit a dead end with the ministry of agriculture. However, once he got in contact with the military, all the bureaucratic hassling disappeared. The FAR is indubitably one of the most influential institutions in modern Cuba today. But this begs a few questions: what are the implications of the concentration of so much economic and political power by an elite cadre of military officers? And how does this concentration of power affect the economy and the society at large?
Future Challenges: Corruption and Rent Seeking
Business in Cuba is rife with corruption, and with a recent effort to reduce fastidious government oversight over business management of SOEs, it will likely increase. In 2009 Raul began sending government agents to examine the accounting books the SOEs. Shortly thereafter, more than a few business managers were incarcerated. For instance, Rogelio Acevedo—a loyal revolutionary who fought with the Castros in 1959 and managed a state aviation company—was fired for “leasing the state’s airplanes off the books.” In another case, a Canadian executive was implicated with fraud, corruption and tax evasion with over a dozen Cuban state officials working in the ministry of sugar and in large SOEs. Finally, 19 employees at an egg factory stole 356,000 dollars worth of eggs for sale in Cuba’s black market. Indeed, the temptation for corruption runs high as business managers and their subordinates manage multimillion dollar enterprises, while earning a mere few dollars per month. In the past five years, there have been myriad corruption cases involving high level military and business elites on the island, and this problem will likely continue to pose a challenge to the state. While economic reforms grant large SOEs greater autonomy, allowing them more leeway in microeconomic decisions, productivity gains will be attained. However, as the government relaxes its authority, business managers “steeped in graft tend to get even greedier.”
Meanwhile these large SOEs also give rise to market distortions that incur enormous costs to society at large. The monopolistic behavior of these large industries may give rise to rent seeking behavior. State bureaucrats who manage these enterprises bear no loss, burden or disincentive for risky or poor decision-making because it is the taxpayers’ money that is wasted, not the bureaucrats. Business elites in the SOEs have ample opportunities to exploit “foreign direct investment and marketization” for their own personal gain. Worse yet, the process of gradual reform could possibly exacerbate these existing market distortions—or possibly create new ones for rapacious opportunists to exploit. This will undoubtedly expand the widening gap between the winners and losers in Cuban society.
FAR in the Post-Raul Future
Many commentators predict that Miguel Diaz Canel, the current vice president who is being groomed for the presidency once Raul steps down in 2018, will face many challenges as the next in line. Although the military is nominally subordinate to the civilian apparatus of the PCC, the majority of its member stem from the FAR. Indeed, many Cuban analysts seem to believe that the military will be the true power that Diaz Canel will answer to. In truth, the military has very powerful interests it will seek to jealously protect. In any event, any post-Raul leader will not want to take any measures that alienate the economic interests of the military. Therefore, he must ingratiate himself with the military, though those who know Diaz Canel say he has already nurtured constructive relations with provincial military leaders who have recently ascended to key positions in the government. In all, the military will continue to be a significant political power in Cuban society, and, as power transfers to a new civilian leader, it will ultimately attempt to form a transition that is favorable to its economic interests.
Conclusion
The Special Period was the worst economic disaster in the history of Revolutionary Cuba. The severe economic malaise challenged the sustainability of the Revolution. As a result, economic security became a salient national security principle, and, the FAR, was tasked with the duty of improving the economy. During the late 80s and 90s, Raul sent hundreds of high-ranking officers to master the skills and techniques of business management. These market-oriented methods were almost immediately put to use to augment the efficiency and productivity of State Owned Enterprises all over Cuba. The FAR’s role in the economy continually expanded as the state formally adopted its techniques in these SOEs. The power and influence of the FAR steadily grew and crystallized under the reign of Raul Castro. Upon his rise to power, Raul purged most of the remaining hard-line anti-market ideologues and built a Raulista consensus with loyal army technocrats. Consequently, to this day, the military is the most powerful institution in the Cuban political and economic apparatus. This concentration of power is producing an elite with special privileges vis-à-vis ordinary Cubans. It is also producing rampant corruption and rent seeking behavior—especially as the government decreases its oversight over monopolistic state companies. Ultimately, this elite cadre of army officers will seek to protect the privileges and benefits they enjoy as the economic overlords of Cuba. Since they wield so much political clout, it is unlikely that Raul Castro's appointed successor would seek to directly challenge their interests. On the contrary, Miguel Diaz Canel will most likely work with the business elites to continue with the national reform agenda. In the Cuba of the 21st century, charisma and revolutionary rhetoric by itself cannot sustain socialism. Ultimately, the political legitimacy and stability of any Cuban government will rest upon its ability to improve the material prosperity of its citizenry. For that reason, the military elites will seek to promote a gradual, yet practical national growth strategy that produces tangible economic progress, while ensuring regime continuity—and their positions within it.
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