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A Touch Of Capitalism (Int'l Edition)

International -- European Cover Story

A TOUCH OF CAPITALISM (int'l edition)

Castro tries to keep the wolf at bay through careful injections of private enterprise

Cuba's economy has seen many grim days since the Soviet Union collapsed and subsidies to Castro's industrial dinosaurs disappeared. Yet what's a dictator to do? As Castro has seen, opening up to capitalism and democracy in Russia cost his former mentors their grip on power. Castro might have played the China strategy and made Cuba a haven for companies looking for cheap labor, but the U.S. embargo has made that impossible.

So Castro is trying to lead Cuba into the 21st century his own way. With the economy under continuous strain, he is counting on cautious, piecemeal reform. He is pruning bankrupt state companies because he doesn't have money to support them. But he isn't giving up control (page 36). Fearing popular discontent, he is allowing redundant workers to become self-employed, but he won't let them set up full-fledged private businesses (page 38). To boost agricultural productivity, he's encouraging private farming, but he won't let the new farmers own their land (page 37). In short, Castro's capitalism a la carte is keeping the aging leader in power. But it won't fix Cuba's fundamental economic problems.

To buy time, Castro has sought out foreign investment from brash companies such as Sherritt International Corp. That, combined with a push for tourist dollars, has staved off collapse. Indeed, after plunging more than 10% in both 1992 and 1993, the government claims the economy grew close to 8% in 1996 (chart).

But Cuba's trade deficit is ballooning, too. One reason is that the costs of food imports have been rising even as prices for sugar, the island's chief hard-currency earner, have fallen. The U.S. Helms-Burton Act adds to the pressure by inhibiting foreign investment. Cuba has made no payments since 1986 on its long-term debt, which now totals $10.5 billion, and no new long-term credit is in sight. The financial squeeze clearly worries Cuban officials. As a result of it, warns Minister of Economy & Planning Jose Luis Rodriguez, growth could slow to 4% this year on a still-shrunken economic base.

Castro's gambit hinges on making thousands of poorly managed state companies more productive. The government is forcing them to boost efficiency or go out of business. The shakeup has cut subsidies from 5.4 billion pesos in 1993 to 1.4 billion last year--$74 million at current free-market exchange rates. For the first time since 1986, state companies are contributing more to the economy than they are siphoning off. Says Francisco Soberon, president of Cuba's central bank: "We have taken very, very tough steps."

Just how tight the squeeze is can be seen at the Ernesto Che Guevara Electronic Components Complex in Pinar del Rio province. Management has slashed payroll by half, to 600 workers, since 1990, as supplies and markets for the radios and components it produced for other socialist countries disappeared. The company found opportunities in the domestic market, producing electrical backup systems for Cuba's frequent blackouts.

CHANGING MIND-SET. Meanwhile, the government is trying to regroove longtime socialist managers as market-oriented thinkers. "The change [in Cuba] is mental and even ideological," says Minister of Basic Industry Marcos Portal, who sends his managers business classics such as In Search of Excellence to read. "Before, people had to be satisfied with whatever you produced. Now, managers have to pay attention to the market and to their customers."

To change the mind-set, Havana University has launched an MBA program. Its first 50-member class, which graduated in February, was chosen from 800 applicants. Two-thirds were executives of state companies, and the rest were professionals who began their careers studying Marxist planning. The courses range from accounting to foreign trade. But there are ideological ironies. Gripes one MBA student: "I am studying about investing capital when Cubans cannot invest in Cuba. If you are a foreigner abroad, you can invest. But if you are a Cuban, no."

Increasingly, Castro is trying incentives to boost productivity. Some 1.3 million workers--about one-third of the workforce--have received noncash bonuses such as clothing, or dollar incentive payments for greater output. At Suchel, a maker of toiletries that has joint-venture partners such as Britain's Unilever PLC, salespeople can earn about one-third more than some Cuban executives.

Still, most Cuban factories are mired in inefficiency, and that poses a political dilemma for Castro. He needs to keep workers employed to maintain stability and some faith in socialism. But the country can't afford to keep idle workers on state-enterprise payrolls indefinitely. Where will the jobs come from? Observers inside and outside Cuba say that Castro must unleash more private enterprise to create growth and jobs. But the 70-year-old political boss knows only too well that economic freedom often ignites independent political activity--and social unrest.

NEW RESTAURANTS. On the streets of Havana, Cubans don't talk much about these issues. For most, life seems better than in the early 1990s, when the economy was crashing and even rationed food was scarce. In fact, Havana these days is a city coming back to life. Locals frequent dozens of new restaurants, both family and state-run. Farmers' markets brim with vegetables, beans, and meat for sale at free-market prices in pesos. Even so, Cuba's food production falls short of the population's needs. Those workers who can't afford to pay high market prices must rely on meager rations of meat, sugar, and eggs.

If the experience of other economies-in-transition is any guide, crunch time may be nearing. Castro still rules Cuba with an iron grip. However, like the leaders of Russia and China before him, he may face pressure for change from new forces within his country. Self-employed entrepreneurs may soon start looking for ways to reinvest their profits. Managers of state companies might well seek greater autonomy from the bureaucracy. Like it or not, Castro may have to introduce far more sweeping market reforms just to sustain a modest recovery. If not, the alternative is likely to be slow and painful decline.By Gail DeGeorge in HavanaReturn to top

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