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After Raul Castro

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In the 1990s, Cuba sent its military officers, who had previously trained at prestigious Soviet military schools, to learn hotel management in Spain and accounting in Europe, Latin America, Asia, and Canada. Upwardly mobile officers burnt the midnight oil reading business books such as In Search of Excellence by Tom Peters and Robert H. Waterman.

As Defense Minister, Raul Castro adopted standard accounting and management incentives to run military owned factories that made everything from uniforms to bullets. In some cases, workers were given modest bonuses. The reforms are known as perfeccionamiento empresarial, loosely translated as "entrepreneurial improvement." The government cautiously courted foreign capital and invited foreign entrepreneurs to jumpstart the economy.

The experiments sometimes flopped. In 1998, a Spanish businessman started a travel agency and hydroponics vegetable farm inside the vast helicopter hangar at a former submarine base in the port of Mariel. The farm proved short-lived because Aerogaviota, the transport company belonging to the Cuban army, was unreliable. It shipped only a few loads of produce; the rest was left behind to rot. The Spaniard found it impossible to coordinate Cuban labor with unpredictable transport flights. This episode is typical of business in Cuba.

According to retired American diplomat Philip Peters, now a director of the Lexington Institute, by the year 2000 approximately 1,400 state companies out of 3,000 were being evaluated for or being run under perfeccionamiento management techniques. Using such methods tripled profits in just two years for a tire plant, according to the manager who spoke to Peters in 2001. As Cuban enterprise gains in productivity through perfeccionamiento, the groundwork is laid for market reform in the future.

The military found foreign joint venture partners for Cuba's moribund citrus industry, which collapsed after losing its markets in the Soviet bloc. With citrus being one of Cuba's most important exports, the joint venture with Grupo BM, an Israeli firm that operates a 115,000 acre grapefruit farm with state-of-the-art drip irrigation techniques, has become Cuba's most important citrus company. Ironically, the Israeli government, unable to say no to its benefactor in Washington, is one of only four nations to vote in favor of the U.S. embargo when the UN General Assembly roundly condemns it every year.

Fidel's About Face

I remember the hope that Cubans and foreign businessmen felt at that time. There was an endless whirl of conferences, expos, trade shows, and trade agreements. I attended one such conference in February 2003, which featured presentations by Senators Maria Cantwell (D-WA) and Kent Conrad (D-ND). Alamar Associates, trade consultants specializing in Cuba since 1974, had organized the U.S.-Cuba Agricultural Conference. Alamar, headed by Kirby Jones, negotiates contracts to sell agricultural and food products to Cuba, obtains travel licenses from the U.S. Government and arranges visits to Cuba, which require a special Treasury license.

During a meeting at Havana's Palacio de Convenciones, Fidel Castro himself unexpectedly dropped by, spoke for hours about agriculture and commodity prices and then took live questions from the audience. It was an exciting moment. I sat in the second row, three meters from Castro, and was called on to speak. I remember how the distinguished panel, including the senators, Kirby Jones, and top Cuban government ministers, not to mention the Cuban security men, held their breath as I spoke. No one knew what I, an unknown young man in suit and tie, might say to el Commandante. Security had already been staring at me and I know what everyone was thinking: Is he Cuban-American? Will he say something inflammatory?

"Given the shortage of food in Cuba and rising food prices worldwide, would Cuba adapt Chinese-style economic reforms?" I asked.

Fidel's long-winded, circuitous answer was that comparisons between the two countries could not be made, Cuba already had its agrarian reform in the 1960s and farmers' markets were currently open. There would be no reform.

Fidel meant what he said. In 2003, he reversed the business opening, arguing that they were sullying the revolution. By 2004, Cuba's economy had turned a corner and Fidel canceled business and management courses funded by the European Union, Sweden, and Canada, which together trained more than 1,300 high-ranking Cuban officials in capitalist management techniques. As a result, free trade zones vanished, self-employment was curtailed and joint ventures were put on hold indefinitely.

As of 2008, Cuba conducts $2 billion annually in oil barter for medical care with Venezuela, and China invests heavily in Cuban nickel mines. Tourism receipts, remittances from abroad, and pharmaceutical and cigar exports comprise the economy's remaining components. All are state-driven.

The Military's Role

For ideological and political reasons, Cuba effectively cuts itself off from the world economy when the U.S. embargo does not accomplish this for it. The inevitable result is autarky, a subsistence economy, no savings and public dependency on the state. I am not suggesting that the Castros secretly want the U.S. embargo to continue or want to keep the Cuban people impoverished. They don't, and an end to the U.S. embargo in their lifetime would be a huge political triumph for them. Once the initial euphoria wears off, it would also be the beginning of the end of the political system they built. The current Castroite system needs monopolistic control as well as conflict and controversy to keep it from going soft. This is not a value judgment. The Castroite system is incompatible with, fearful and mistrustful of the decentralized, impersonal, corporate power that could pose a challenge to it if given a toehold in Cuba. An analogy would be the uneasy feeling many American communities have towards Wal-Mart. I do not think the Castroite system is without its merits and rationale, but it belongs to an earlier time, just like the embargo. Barriers are an anachronism. Theory needs to catch up with reality. One group unlikely to bring up these questions is the military.

The Cuban military, as the obedient servant of state power and with the ability to command and control without ownership, has expanded its sphere of influence. Today, the military's web of companies is run by the Grupo de Administracion Empresarial SA, or the Business Administration Group, which is located on the fourth floor of Cuba's defense ministry building. Known by its Spanish acronym GAESA, the group was headed by Gen. Julio Casas Regueiro until he became defense minister on February 18, 2008, the day Raul succeeded Fidel. Raul Castro's son-in-law, Col. Luis Alberto Rodriquez, was the group's deputy head.

By turning officers' clubs and naval bases into resorts, the tourism company Gaviota, which means sea gull, has become GAESA's most important business. They control the best hotels but leave management to Spain's Sol Melia and France's Club Med. Of Cuba's roughly 40,000 hotel rooms, Gaviota currently has approximately 8,500 .

Retired Col. Hal Klepak, Canada's former military attache in Havana, has written a book on the Cuban military. According to Col. Klepak, Gaviota also runs Aerogaviota (mentioned above). For military enthusiasts who wish to visit the island's colonial forts and the barren land that surrounds the U.S. naval base in Guantanamo, Gaviota offers exclusive tours. It also rents cars, runs marinas, manages gourmet restaurants and operates an attraction that allows tourists to swim with dolphins, according to a recent study by the Spanish Institute of International Trade.

Generals hold the top management slots in the country's economic ministries. Cuba's ex-sugar czar, Gen. Ulises Rosales del Toro, shut down two-thirds of Cuba's approximately 156 antique sugar mills in 2002. The country is still trying to revive production, which reached a 100-year historic low of 1.3 million tons in 2006. In addition to Gen. Rosales del Toro, other generals run the civil aviation, fishing, telecommunications and transportation ministries. A colonel runs Habanos SA, a joint venture with the Spanish firm Altadis, which markets the country's famous cigars abroad. Another colonel runs the tourism ministry.

Mark Entwistle, a former Canadian ambassador to Havana who now advises foreign companies in Cuba, has said the military has the power to cut the bureaucratic red tape that bedevils other Cuban entities. For example, a Canadian business that wanted to grow soybeans was unable to get permission from the ministry of agriculture. But once the Canadians approached the military, the red tape vanished. "The military has a whole unit devoted to doing joint ventures in agriculture," says Mr. Entwistle. "There was zero ideological content, it was 100 percent business."

Giving the armed forces a critical role in running the economy has helped the Castro brothers reward their supporters and gives the military a stake in the status quo. But it has also opened a corrupting influence in the military that could worsen if the military's role expands further in a post-Raul Cuba. A number of high-ranking "entrepreneur soldiers" have already been discharged and are often jailed for corruption.

The military also faces internecine rivalry within the ranks. Many officers envy fellow soldiers involved in joint ventures and covet their superior living standards.
Ricardo Pascoe, former Mexican ambassador in Havana, warns of a new elite: the "juniors" ?? sons of senior military officers who stationed abroad. They enjoy privileges undreamt of by ordinary Cubans. During his time in Havana from 2001 to 2003, many Mexican businessmen complained to him that the "juniors" were demanding bribes and kick-backs as a condition of doing business with their fathers.

Economic Reforms in 2009

In March, the Cuban leadership replaced eight ministers and several top officials and brought armed forces generals, former officers and middle-aged Communist Party officials into the cabinet. The most notable dismissals included Carlos Lage, widely credited with saving the country after the collapse of the Soviet Union, and Felipe Perez Roque, a likely successor to Raul. These moves leave little doubt that the military will take power on Raul's demise. They may also reflect Fidel Castro's infamous paranoia. The fact that Fidel was consulted before the firings is evidence of his continued power, even from a hospital bed.

At the same time, Raul has loosened controls on how state companies spend foreign currency. He canceled a decree requiring the Central Bank to approve all state company expenditures in excess of $10,000. Business leaders are relieved and said the change would benefit the entire economy by reducing bureaucratic delays and paperwork. They believe manufacturing, tourism and agriculture will improve.

The 2003 decree was originally enforced at the behest of Fidel Castro to fight corruption. It was part of the re-imposition of rigid control after the loosening of the 1990s to cope with deep economic crisis. Raul Castro, 77, by bringing trusted military officers and other allies into his cabinet, is setting the stage for his own succession.

Cuba's economy was battered by three hurricanes in 2008, drops in commodity export prices and the global financial crisis. In one year, Cuba's current account went from a $500 million surplus to a deficit of more than $2 billion.

Since taking office last year, Raul Castro has taken small but symbolic steps such as lifting restrictions on some consumer goods and rescinding tourist hotels' exclusion of Cubans. He has also decentralized agriculture, granted producers more autonomy and lifted income caps, declaring that workers and farmers should maximize their income. As Deng Xao Ping famously said as China abandoned the Soviet economic model and created a mixed economy in the 1980s, "it matters not whether a cat is black or white, as long as it catches mice."

After Fidel's death, Raul, assuming he is in good health, will accelerate economic reforms and liberalization. Cuba will be more pragmatic. China will be its role model because of enviable growth statistics. But the Cuban state will resist the formation of a moneyed elite outside its own ranks. At some point in the future, Cuba will no longer be able to resist, though the exclusion of exile money and personalities will be a more achievable priority.

After Raul, a disciplined group of senior army officers will likely rule Cuba in collective fashion. They will have command over the economy and political life, and the security services will clamp down very heavily. At some point, a new personality will emerge to critique Fidel and Raul's "errors." The new leadership will decree further loosening of economic restrictions on small-scale Cuban enterprise and foreign investment and will seek rapprochement with the United States. The government will commute political prisoners' sentences but will not permit organized political opposition. Cubans will not accept American-style elections and the Cuban government would be suicidal to accept them.

What Washington Should Do

If the United States normalizes relations without insisting on elections as a pre-condition, politics in Cuba will have to fast-forward toward a more democratic arrangement because the state of emergency will be over, it will appear the Cubans have "won," and the population will no longer abide by strict limitations and restrictions imposed on civil and economic life. If the U.S. posture remains hostile, i.e. the embargo, and there is a credible threat that Cuba will be taken over by Miami exiles, then the Cuban government will maintain its character.

After Raul, U.S. policy must remain decoupled from Florida politics. This does not imply that the U.S. should wait for him to die before changing its posture. That foolish strategy failed with Fidel. Raul will not leave his succession to chance either and his replacement will not make the changes Washington seeks.

The time to engage Cuba is now. This means not just sitting down to chat, as Obama said he would during the election campaign, but the normalization of relations with a country with whom we are not at war. By engaging Raul now, his successors will have to continue the process from day one. American policy makers must not be misled into believing that somehow, after the Castro lineage is finished, the Cuban government will back down or be overthrown, as if Cuba were a monarchy or tin-pot dictatorship. Nationalism predates the Castros and will thrive after the Castros are dead. American policymakers must not be seduced by the Miami-Cuban fantasy of turning back the clock to 1959 and taking over. That is the road to Cuban civil war, a war that Miami will lose.

The time to engage Cuba is now. Only this way can we influence what happens in Cuba instead of reacting to one fait accompli after another.

This essay is an excerpt from Cuba at a Crossroads, The New American Strategy. It is Daniel Bruno Sanz's latest work. Dedicated to Michelle Obama and written for the 111th Congress and the State Department, Mr. Sanz deconstructs the mind of Fidel Castro and makes forecasts for Cuba's future. Cuba at a Crossroads is a scholarly study of economics, politics and U.S.-Cuba relations. It argues that the U.S. embargo is contrary to the national interest and counterproductive to civil society in Cuba.