Guns and Butter
Cuba's Military
Puts Business
On Front Lines

In the 1990s, Raúl sent 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, says Mr. Amuchastegui. For a time, business books such as "In Search of Excellence" by Tom Peters and Robert H. Waterman became required reading for ambitious officers looking to advance in the ranks, says Eugenio Yañez, an economist who taught management to army officers at Havana's Superior Institute of Economic Direction.

Raúl, now 75, also adopted capitalist-style accounting and management incentives to run military-owned factories that made everything from uniforms to bullets. In some cases, workers were given incentive pay. Modest by Western standards, these reforms, called "perfeccionamiento empresarial" -- loosely translated as "entrepreneurial improvement" -- were nevertheless cutting-edge for Cuba.

For most of his career, Raúl Castro was considered a tough, even brutal, communist whose hand, as he put it, "didn't tremble" in 1989 when he ordered the execution of a former close colleague deemed a danger to the regime. Some analysts don't think he has changed much since then. "He's a Stalinist," says Jaime Suchlicki a Cuba analyst at the University of Miami, who predicts Raúl will resort to more repression after Fidel dies.

In recent weeks, speculation has grown about Fidel's health problems. The longtime dictator temporarily relinquished power on July 31 to Raúl after announcing he had undergone surgery for intestinal bleeding. After rumors of his death swirled in Havana, the Cuban government released a video on Oct. 28 showing a gaunt and aged Castro in a track suit. U.S. officials believe Mr. Castro has some sort of stomach or colon cancer. With his brother incapacitated, Raúl has taken a blustery communist line. "When the U.S. says there should be a transition in Cuba, they mean a shameful return to the neocolonial garbage of capitalism they imposed on this country for 60 years," Raúl told an audience of government union leaders in September.

But many Cuba watchers believe those statements are meant to give political cover to Raúl, who has become more pragmatic as he has aged, and has been searching for ways to improve Cuba's dismal economic performance, especially after the Soviet Union ended its subsidies in 1990. Between 1989 and 1993, Cuba's gross domestic product fell 35%, while the island's foreign trade slumped by 75%, says Carmelo Mesa-Lago, professor emeritus of economy at University of Pittsburgh.

As living standards plummeted, Havana residents ate many of the city's cats. An epidemic of optic neuropathy, caused by deficiencies in nutrition and resulting in temporary blindness, struck down some 35,000 Cubans. For Raúl, economic security became a critical part of national security. "Beans are more important than cannon," he told troops in 1994.

Desperate to cut costs, Raúl slashed the military from about 300,000 troops in 1990 to some 45,000 today, according to Frank O. Mora, a Cuban military expert at the National Defense University in Washington. To revive the economy, he pushed innovations such as farmers markets and self-employment for plumbers, hairdressers and other small-time entrepreneurs.

At the time, Fidel Castro reluctantly allowed the changes, because Cuba had little alternative. The Castro brothers appointed military and intelligence officers, who were their most trusted and unswervingly loyal supporters, to court foreign capital. Col. Gustavo Loret de Mola, an electrical engineer by training, was named deputy minister of communications and negotiated Cuba's first cellphone deal, with a Mexican company, in 1991, says his son, Camilo Loret de Mola. He helped the military recruit foreign tenants for Soviet-built bases that were turned into duty-free zones.

The experiments sometimes flopped. In 1998, the younger Mr. Loret de Mola says he persuaded a Spanish entrepreneur to start a travel agency and hydroponics vegetable farm inside the cavernous helicopter hangar at a former submarine base in the port of Mariel. The businessman only managed to send a few flights of cucumbers and tomatoes on Aerogaviota, an airline owned by the Cuban armed forces, before the farm went out of business. "When he had workers to harvest the vegetables, he couldn't get a plane, when he could get a plane, he couldn't get workers," says Mr. Loret de Mola, who now sells insurance in Miami.

By 2000, some 1,400 state companies out of about 3,000 were being evaluated for or being run under "perfeccionamiento" management techniques, according to Philip Peters, a former U.S. diplomat who is now a director of the Lexington Institute, an Arlington, Va., think tank. A manager of a tire plant told Mr. Peters in 2001 that using such techniques had tripled profits in just two years. While far from a free-market reform, Mr. Peters believes that the military has laid the groundwork for further-reaching reforms in the future.

Another success: The military found foreign joint-venture partners for Cuba's moribund citrus industry, which almost collapsed after losing its markets in the Soviet block. Today, citrus is an important export. Cuba's most important citrus company is a joint venture with Grupo BM, an Israeli firm that operates a 115,000-acre farm that grows grapefruit using state-of-the-art drip irrigation techniques.

An International Monetary Fund study in 2000 said the limited reforms pushed by Raúl were "instrumental" in helping turn the economy around in the mid-1990s. But then Fidel Castro clamped down on reforms, arguing that they were sullying the revolution. Now, Cuba relies on about $2 billion annually in fuel subsidies provided by Venezuela's populist president Hugo Chávez, and hundreds of millions of dollars of Chinese investment in Cuban nickel mines.

With reforms out of fashion, Cuba since 2004 has 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. Free-trade zones emptied, while the number of self-employed Cubans as well as foreign joint ventures fell sharply.

But the military's own economic empire has continued to grow. Today, the military's web of companies are run by the Grupo de Administración Empresarial SA, or the Business Administration Group. Known by its Spanish acronym Gaesa, the group is headed by Deputy Defense Minister Gen. Julio Casas Regueiro. The group's deputy head is Col. Luis Alberto Rodríguez, Raúl Castro's son-in-law. The group is run from offices on the fourth floor of Cuba's defense ministry, according to Mr. Mora of the National Defense University.

Gaesa's most important business is Gaviota, the tourism company. Gaviota, which means "sea gull," began by turning officers' clubs and navy bases into resorts. Now it has about 8,500 rooms out of Cuba's total of 40,000 hotel rooms. Many of its hotels are luxury four- and five-star establishments managed by companies such as Spain's Sol Melia and France's Club Med.

Gaviota also owns the domestic airline, Aerogaviota, which uses Cuban air-force pilots who fly refurbished Soviet transport airplanes. The company even organizes tours for military enthusiasts who want to visit the island's colonial forts and the no-man's land surrounding the U.S. naval base in Guantanamo, says retired Col. Hal Klepak, Canada's former military attaché in Havana, who has written a book on the Cuban military. Gaviota 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 also occupy top management slots in the country's economic ministries. Gen. Ulises Rosales del Toro, who was named Cuba's sugar czar in 1997, shut down two-thirds of Cuba's 156 antique sugar mills in 2002 and is still trying to revive production, which reached a 100-year historic low of 1.3 million tons this year. Other generals run the civil aviation, fishing, telecommunications and transportation ministries. A colonel is in charge of Habanos SA, a joint venture with the Spanish firm Altadis, which markets the country's famous cigars abroad. Another colonel runs the tourism ministry.

The military has the power to cut bureaucratic red tape that stifles other Cuban state entities that want to engage in business, says Mark Entwistle, a former Canadian ambassador to Havana who now advises foreign companies in Cuba. In 2004, he says that a Canadian business that wanted to grow soybeans on the island was having a hard time getting permission through the ministry of agriculture. But once the Canadians began dealing directly with 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% business."

Giving the armed forces a critical role in running the economy has helped the Castro brothers reward their supporters and gives them a stake in the preservation of the regime. But it has also introduced a corrupting influence in the military that could worsen if the military's role expands further in a post-Fidel Cuba. A number of high-ranking "entrepreneur soldiers" have already been dismissed and sometimes jailed for corruption.

The military also faces potential dissension within its ranks: Soldiers involved with foreign joint ventures, who live far better than others in the military, are viewed by many officers with distrust and envy, analysts say.

Another problem sign is what Ricardo Pascoe, a former Mexican ambassador in Havana, calls the rise of the "juniors" -- the sons of high-ranking military officers who often live abroad and enjoy privileges undreamed of by ordinary Cubans. During his time in Havana from 2001 to 2003, Mr. Pascoe says, many Mexican businessmen complained to him that the "juniors" charged commissions for contracts through their fathers.

Mr. Mora of the National Defense University believes that if unchecked the "juniors" could become the kernel of semicriminal mafias that could dominate much of the economy if Cuba liberalizes its economy. Instead of China becoming the model for Cuba, he says, Raúl Castro could inadvertently turn Cuba into a Caribbean version of oligarchic, post-Communist Russia.

Write to José de Córdoba at jose.decordoba@wsj.com⁵