But Grau, the martyr of the generation of 1933, would be remembered for redistribution of a different sort. He would go down in the annals of contemporary Cuban history as one of the most corrupt presidents in the five decades between independence and Batista’s 1952 golpe de estado. Cuban historians have dismissed the fashionable physician turned populist politician as a “caricature” of the revolutionary, whose government “surpassed the corrupt politics reigning in Cuba since [the withdrawal of U.S. troops in] 1902.”3 A British historian condemns him as the leader who “did more than any other single man to kill the hope of democratic practice in Cuba.” 4 The collapse of Cuban democracy in the 1950s had multiple causes but key among them was the political corruption that undermined the island’s republican institutions. General Fulgencio Batista would take up the standard of the fight against graft and gangsters when he overthrew Grau’s successor, Carlos Prio, in 1952. Less than seven years later, Batista himself would fall, his own government mortally weakened by the violence and venality of his supporters.
But the Revolution of 1933 survived the ouster of Grau and his radical student supporters. 1933 was not the end, but the beginning of a new era of reform, designed to protect Cuban labor and regulate Cuban business. Between 1933 and 1958, the Cuban government “extended its regulatory and distributive activity enormously,” writes political scientist Jorge Domínguez.7 By the time Grau returned to power in 1944 an extensive system of economic controls was already in place, which began in the sugar sector but were extended to much of the rest of the economy. Those industries not subject to government regulation were controlled by mandatory business and professional organizations, which lobbied for government favors and often restricted new entries. At the center of this regulatory regime was the president, who distributed favors and mediated disputes. The Cuban Congress, like many Latin American legislatures, was relatively weak, with some power to distribute patronage, but little control over the president, who legislated by decree.
The scandals of the Grau administration—such as the alleged pilfering of $174 million in pension funds deposited in the public treasury—were merely the most spectacular manifestations of a system rife with possibilities for rent-seeking, influence peddling, and outright theft. The idealistic reformers of the 1930s had worked to create a state that would protect Cuban workers, Cuban business people, and Cuban bureaucrats from the ravages of worldwide depression. But they also created a complex system of quotas and subsidies, price controls and wage guarantees, licenses and permits—that pitted powerful interest groups against each other in competition for governmentdispensed privileges.
Corruption, of course, did not appear first in the decades before the Cuban revolution. It had deep roots in Cuba’s colonial history. Spanish bureaucrats were accustomed, and expected, to supplement meager official stipends with payoffs and kickbacks. Such “fee for service” corruption may even have had some positive effects by allowing entrepreneurs to “grease the wheels” of a sluggish Colonial bureaucracy.8 In the first two decades of the Republic, corruption was still “patrimonial” in nature: public office was sought largely for private gain.9 Contemporary newspapers printed lurid accounts of graft in public works contracts. Public payrolls were swollen with botellas, literally bottles, meaning fictitious jobs that were never actually filled. The lottery became notorious as a source of income to be portioned out among political supporters. Such corruption had little impact on the private business community. Because there was little state regulation of the economy, interest groups had little reason to lobby for government benefits.
Rent-seeking, defined as “the political activity of individuals and groups who devote scarce resources to the pursuit of monopoly rights granted by governments,” can both exacerbate political factionalism and inhibit economic growth.12 Rent-seeking ranges from outright bribery to costly lobbying for import quotas or licenses, tariff exemptions and other tax privileges, price supports or controls, and government credit or direct subsidies. Competition for government benefits diverts time and resources that might otherwise be devoted to productive activities, resulting in a welfare loss to the economy as a whole. Innovation is discouraged as both entrepreneurs and workers focus instead on winning government favors and blocking the efforts of their competitors to do the same. Economist Anne Krueger has described how protectionist policies in developing nations can create a “vicious circle” of ever-increasing regulation that stifles economic growth. Mancur Olson, in The Rise and Decline of Nations, argued that the rent-seeking behavior of interest groups—or “distributional coalitions”—could accelerate the economic decline of advanced industrial states, such as Great Britain after World War II.13 The fight to distribute, rather than create, wealth can become a zero-sum game as growth stalls. To survive, businesses, banks, and labor unions must focus their energies on cultivating political contacts, whether licit or illicit.
Cubans were well aware of the dangers of depending on one primary export crop. In boom times, as in busts, Cubans leaders realized that sugar alone could not guarantee prosperity. Since 1898, rulers of the island, including U.S. occupiers, had decried the dangers of a one-crop economy. Even before independence, Cuba’s national hero, the poet José Martí, whose words were (and are) quoted like the Bible by politicians of every stripe, had called an over reliance on plantation agriculture “suicidal.” Since the mid- 1920s, diversification of Cuban agriculture and industry had been a fundamental tenet of public policy, supported in principle by the sugar industry itself. And yet entrepreneurs, who had aggressively undercut their international competitors during the early twentieth century, would prove by and large incapable of developing successful new products for the domestic and world markets. National leaders who had once hailed sugar as the source of the island’s relative affluence now condemned it as an Achilles’ heal that was jeopardizing the nation’s stability and independence.
It was Cuban exporters who sought most eagerly to penetrate the U.S. market, not vice versa. Cuba in the first quarter of the twentieth century was poised to become the “world’s sugar bowl.” Its land was ideal for sugar cane cultivation. Its sugar mills boasted the latest technology. Cuba’s very efficiency as a lowcost producer, however, became a threat to competitors abroad. Sugar was—and is—one of the most highly protected commodities on the international market. (Unfortunately for Cuba, another highly protected commodity was the island’s other major export, tobacco). Many European nations, and some Latin American nations, such as Mexico and Argentina, also set up protective barriers to stimulate the domestic production of sugar. There was nothing natural about the world’s “overproduction” of sugar from the 1920s on; it was the result of deliberate government policy.
Among the biggest losers in the tariff battles waged in the U.S. Congress during the early twentieth century were the sugar producers of Cuba, both foreign and domestic. Congress barely passed the Reciprocity Treaty of 1902 after a long and heated debate and despite intense lobbying by beet producers from key Western States. Instead of the free trade advocated by Cuban business and political leaders, it granted Cuba only a 20 percent reduction on the already high overall tariff.
Cuban and U.S. mill owners and cane planters on the island again joined forces with U.S. sugar refiners, soft drink and candy manufacturers to lobby against the Hawley-Smoot Tariff of 1929—and lost. The domestic sugar industry in the United States, also hard hit by low commodity prices, proved politically more powerful. Although sugar producers in Cuba were given a preferential tariff rate in the Reciprocity Treaty of 1934, it came with ropes attached. The Sugar Act of 1934, also known as the Jones- Costigan Act, allocated quotas to the different geographical areas that supplied the U.S. market. Moreover, the quotas were based on U.S. market share during 1931, 1932 and 1933, years when Cuba’s exports had been drastically reduced by the Hawley- Smoot tariff. For the high cost sugar beet producers in the American West, such quotas were a godsend. But for sugar mill owners in Cuba, who had invested heavily to expand production in the 1920s, quotas, though preferable to the prohibitive tariff rates imposed in 1929, were still an unhappy compromise.
Despite the limits of the reciprocity treaty, the Cuban economy grew rapidly in the first decades after independence. Until about 1925, both large and small mills, whether foreign or domestically owned, increased their output. But much of the capacity created by the sugar industry in the 1920s was not used until the Second World War. And sugar, once viewed as a source of wealth, became, according to its critics, an economic albatross.
By the late 1930s, the future of Cuba’s once dynamic sugar industry was in doubt. Efforts to form an international cartel had not only failed to raise sugar prices but encouraged non-cartel members to increase their production. The United States quota system assured Cuban producers of a stable, but not a growing, market. The complex internal system of controls and quotas imposed by the Cuban government from the 1930s on was a response to the industry’s dismal international prospects. With a limited external market, many mills faced certain bankruptcy and tens of thousands of workers faced unemployment. Reorganization of the industry would have been economically painful, and, for a country still reeling from Machado’s overthrow, politically disastrous. Just as U.S. beet sugar producers had demanded import quotas to protect themselves from foreign competition, Cuban producers demanded internal quotas to protect themselves from internal competition. Decree 522, promulgated in 1936, followed a year later by the Law of Sugar Coordination, set up an elaborate regulatory system designed to guarantee the survival of the island’s smaller (and generally least efficient) mills, along with independent sugar planters or colonos. Small mills were guaranteed minimum basic quotas, while larger mills were limited to their average production in 1934 and 1935 (when most were operating well below capacity). Sugar planters or colonos in turn won cane quotas to preserve their share of the cane sold to mills, and also secured restrictions on the amount of “administration cane” large mill owners could grow on their own property. Colonos also won the so-called “right of permanent occupancy,” which meant that as long they met their cane quota and paid their rent (whose amount was tied to the price of sugar), they could never be evicted. And just to be sure no mill owner or cane grower ever went into bankruptcy, the act extended a moratorium on agricultural loans. A final provision of the Act tied wages to sugar prices, although, in reality, sugar worker salaries were allowed to rise with prices, but not to fall as fast or as far.
The economic polices that emerged beginning in the 1930s were geared, not toward growth, but toward protecting Cuban jobs and Cuban businesses. In the words of the World Bank, Cuban economic policies focused on “preserving the status quo and on regulating the division of a fixed national production, rather than on innovation to enlarge the total product.”34 They succeeded. Cuba had about the same number of active mills in 1959 as it had had two decades earlier. But the result was an industry operating well below capacity until the outbreak of World War II.
The Sugar Stabilization Institute, known by its Spanish acronym, ICEA, was in charge of enforcing sugar regulations. ICEA was essentially a legal cartel, governed by a board comprising 12 mill owners, 6 growers, the head of the sugar workers union and a government delegate. The Cuban president appointed the owners and growers from lists submitted by their respective associations. The institute negotiated international contracts and allocated production and crop quotas. But it was the Cuban president who brokered disputes between mill owners and growers, workers and management, intervening to prevent mill owners from using their greater influence in ICEA to the detriment of powerful growers or unions.
The attempt to create risk-free capitalism—at least for domestic producers—was not limited to the sugar sector. Quotas were extended to two other important products, tobacco and coffee. Nor were imports allowed to bring unbridled competition to the island’s domestic market. Most industries were organized in manufacturers’ associations that secured tax advantages, subsidies, and protective tariff barriers against finished products while lobbying for low tariffs on imported inputs. The result was a complex system of taxes and tariffs, riddled with exemptions. Manufacturers did not hesitate to join forces with labor when threatened with technologies that might raise productivity and thus displace workers by putting inefficient enterprises out of business. Attempts to mechanize cigar production beginning as early as the 1920s were repeatedly thwarted by a powerful alliance of small manufacturers and skilled workers. Candy manufacturers who invested in modern machines during the 1940s had to run them at the lowest possible speed so as not to put their rivals out of business and displace workers. Textile factories faced potent opposition from their competitors and their workers as they tried to raise productivity in the 1940s and 50s. Measures designed to protect employment discouraged the creation of new jobs. A self-regulatory commission, created to defend Cuba’s shoe industry from the competition of cheap imports and the even cheaper products of local “cottage” manufacturers, went so far as to outlaw the establishment of new factories.
The financial system also faced regulations designed principally to protect Cuban borrowers from the risk of bankruptcy. After the crash of 1921, the government instituted a moratorium on debt repayments that was extended and expanded in 1933 and 1934 and eventually enshrined in the Constitution of 1940. The fact that foreigners controlled the banking sector did not hinder the government’s willingness or ability to impose onerous regulations. “Had there been domestic banks, their influence and public concern for their solvency might have caused the moratorium laws […] to be less sweeping,” wrote a North American economist in 1950. “Since the foreign banks can hardly fail, the government need not be too considerate with them.”37 But the moratoria did not just affect foreign bankers. Many Cubans had invested their savings in real estate mortgages, which offered safety and a relatively high return. Under the moratoria, such domestic capital was frozen and the returns either eliminated or substantially reduced. Cubans seeking safety and higher returns had to export their savings abroad, further reducing the supply of local capital.
Labor legislation had become a complex web of benefits, wage controls, job guarantees, un-and underemployment subsidies, arbitration procedures, health and safety regulations plus measures designed to regulate (and, if necessary, repress) labor unions and professional associations. All these new rules, of course, were multiplied by the daily bureaucratic rulings on the requests of individual producers to trade quotas, hire or fire workers, renovate facilities, import machinery and more.
One of the tragedies of Ramón Grau San Martin’s presidency is that on assuming office he seemed to promise a new style of government, which would be both populist and transparently honest. Well aware that battling corruption had become a key political issue, Grau made public his own income and assets, ordering his cabinet to do the same. Despite this auspicious beginning, scandals and escalating violence by warring political gangsters marred his rule and tainted that of his handpicked successor, Carlos Prio.
The high-level thievery of Grau and his associates seems to have been unprecedented in scope and audacity. In 1948, his education minister and close friend José Manuel Alemán fled to Miami, where U.S. officials discovered $20 million in cash, stuffed in his suitcase.50 Then a shortfall of some $40 million was discovered at the start of Prio’s government in the social security and private pension funds deposited with the Cuban treasury, primarily by the powerful sugar workers’ union. As the World Bank noted wryly in its 1951 report, “the government of that time levied a forced loan on non-governmental pension funds lodged with them, without any formal acknowledgment of debt and, therefore, without paying the retirement funds any interest for use of their money.”51 In 1950, ex-president Grau himself was charged with misusing $174 million. But his trial was indefinitely—and in the end definitively—delayed after gunmen invaded the courthouse and stole all documents relevant to the case.
The tragic climax to the Auténtico Party’s seven-year rule came in March 1952 when Grau’s old nemesis, General Batista, seized power in a coup. Seven years later, Batista himself would be overthrown by Fidel Castro and his followers. Castro would later publicly embrace socialism and make opposition to U.S. imperialism the ideological keystone of his regime.
But the politics of post-revolutionary Cuba, forged in the heat of the Cold War, should not obscure the history of the Republic’s last years. As political scientist Jorge Domínguez has pointed out, “by the 1940s and early 1950s, nationalism had declined in appeal as an ideology,” largely as a result of the reforms that had given Cubans—whether businessmen or bureaucrats —control of the economy.52 Shortsighted and selfish as U.S. policies toward Cuba may have been since independence, the final unraveling of the Republic obeyed a largely internal dynamic. Well-intentioned reform, ever more-complex regulation, endemic rent seeking and high-level corruption not only undermined a once dynamic economy but helped discredit democratic rule.
1. See E. Vignier and G. Alonso, La corrupción política y administrativa en Cuba: 1944-1952 (Havana: Editorial de Ciencias Sociales, 1973), 4.
2. Quoted in Jorge I. Domínguez, Cuba: Order and Revolution (Cambridge: Harvard University Press, Belknap Press, 1978), 108.
3. Vignier and Alonso, Corrupción, 29.
4. Hugh Thomas, Cuba or The Pursuit of Freedom (New York: Harper & Row, 1971), 737.
5. Louis A. Pérez, Cuba: Between Reform and Revolution (New York: Oxford University Press, 1995), 287.
6. Thomas E. Skidmore and Peter H. Smith, Modern Latin America, 4th ed. (New York: Oxford University Press, 1997), 272.
8. See Nathaniel Leff, “Economic Development Through Bureaucratic Corruption,” American Behavioral Scientist 8 (1964).
9. Domínguez calls Cuban politics in the early Republic “neopatrimonial” after Max Weber’s definition of the patrimonial political system as one where “all government authority and the corresponding economic rights tend to be treated as privately appropriated economic advantages.” See Domínguez, Cuba, 35-36.
10. International Bank for Reconstruction and Development, Report on Cuba (Washington, D.C.: International Bank for Reconstruction and Development, 1951), 66. Hereafter referred to as World Bank, Report.
12. William C. Mitchell and Michael C. Munger, “Economic Models of Interest Groups: An Introductory Survey,” American Journal of Political Science 35, no. 2 (May 1991), 525. See also Anne O. Krueger, “The Political Economy of the Rent Seeking Society,” The American Economic Review 64, no. 3 (June 1974), 291-303; and “Virtuous and Vicious Circles in Economic Development,” The American Economic Review 83, no. 2 (May 1993), 351-355; Kevin M. Murphy, Andrei Shleifer, Robert W. Vishny, “Why is Rent-Seeking so Costly to Growth?” The American Economic Review 83, no. 2 (May 1993), 409-414; and, Andrei Shleifer, Robert W. Vishny, “Corruption,” The Quarterly Journal of Economics 108, no. 3 (Aug. 1993), 599-617.
13. Mancur Olson, The Rise and Decline of Nations (New Haven, Conn.: Yale University Press, 1982).
14. Henry Christopher Wallich, Monetary Problems of an Export Economy: The Cuban Experience, 1914-1947, Harvard Economic Studies, vol. 88 (Cambridge: Harvard University Press, 1950), 3.
15. See GDP estimates gathered by Angus Maddison in Two Crises: Latin America and Asia, 1929-38 and 1973-83 (Paris: OECD, 1985), Table A.1. According to Maddison, in 1929 Argentina’s per capita income was U.S. $415, Chile’s was $250 and Cuba’s was $238. Mexico and Brazil both had per capita incomes of about $85. Life expectancy at birth was more than 40 years, second only to Argentina, and the literacy rate was 70 percent. See Cuban Economic Research Project, A Study on Cuba (Miami: University of Miami Press, 1965), 208. Hereafter referred to in footnotes as CERP, Study.
16. According the census of 1931, 51.36 percent of the population lived in cities of more than one thousand inhabitants. CERP, Study, 305.
17. Cuba had nearly 3.4 kilometers of railroad per 1,000 persons; the United States had about 2.4 kilometers per 1,000 persons. World Bank, Report, 241.
18. See CERP, Study, 579, 582-583.
19. World Bank, Report, 7.
20. Rafael Fernández de Castro, a reformer and advocate of autonomy from Spain. His actual words were: “Sin azúcar no se concibe la isla de Cuba y sin el consumo de ese producto por los Estados Unidos no se concibe nuestra existencia como pueblo culto.” Quoted in Julio Le Riverend, Historia Económica de Cuba (Havana: Editorial de Ciencias Sociales, 1985), 538.
21. José Comallonga, cited in J. Alvarez Díaz, et. al., Cuba: Geopolítica y Pensamiento Económico (Miami: Duplex Paper Products of Miami for the Colegio de Economistas de Cuba en el Exilio, 1964), 289.
22. Fernando Ortiz, Cuban Counterpoint: Tobacco and Sugar (Durham, N.C.: Duke University Press, 1995).
23. Ramiro Guerra y Sánchez, Azúcar y Población en las Antillas (Havana: Editorial de Ciencias Sociales, 1970). This was first published in 1927.
24. Herminio Portell Vilá, La industria azucarera y su futuro (Havana: Molina y Cía, 1942), 20. Pamphlet reprinted from Revista Bimestre Cubana 50, no. 2 (July-Dec. 1942).
26. See, for example, Jorge Ibarra, Prologue to Revolution: Cuba, 1898-1958 (Boulder, Colo.: Lynne Rienner Publishers, Inc., 1998), and Oscar Pino Santos, El asalto a Cuba por la oligarquía financiera Yanqui (Havana: Casa de las Américas, 1973).
27. William Appleman Williams, The Tragedy of American Diplomacy, 2nd ed. (New York: Dell Publishing Co., 1972).
28. Louis A. Pérez, Jr., Cuba under the Platt Amendment, 1902-1934 (Pittsburgh, Pa.: University of Pittsburgh Press, 1986), xv-xvi.
29. Judith Goldstein, Ideas, Interests, and American Trade Policy (Ithaca: Cornell University Press, 1993), 8. See also Cynthia A. Hody, The Politics of Trade: American Political Development and Foreign Economic Policy (Hanover, N.H.: University Press of New England, 1996) on the institutional impediments to international economic cooperation.
30. See CERP, Study, 265. On Cuban unions and U.S. tobacco manufacturers, see Jean Stubbs, Tabaco en la periferia: El complejo agroindustrial cubano y su movimiento obrero, 1860-1959 (Havana: Editorial de Ciencias Sociales, 1989), 47.
31. See for example The Cuba Review, 4 (February 1906), 22. The Cuba Review, published by the Munson Steam Ship Line, originally promoted U.S. colonization of the island. By the mid-1910s, however, the magazine covered mainly the sugar industry.
32. Cuba, Census of the Republic of Cuba, 1919 (Havana, n.d.), 60-61.
33. José Antonio Guerra, Appendix to Guerra, Azúcar y Población, 258.
34. World Bank, Report, 779.
35. Oscar Zanetti, Dinámica del estancamiento: El cambio tecnológico en la industria azucarera cubana entre 1926 y 1958 (Havana: Instituto de Historia de Cuba, 1996), 32.
37. Wallich, Monetary Problems, 166.
40. Calculated from the list compiled by Milo A. Borges, Compilación Ordenada y Completa de la Legislación Cubana, 1899-1950, vol. 3 (Havana: Editorial Lex, 1952) and Mariano Sánchez Roca, Compilación Ordenada y Completa de la Legislación Cubana, 1951-1958, vol. 4 (Havana: Editorial Lex, 1960). Borges lists laws, decree-laws, accords, and ministerial resolutions both chronologically and by subject. I have used his subject categories, while taking care not to double count items that may appear in several categories.
41. Ibid. This includes some sugar legislation.
42. The shark takes a bath, but he splashes, meaning that Gómez made sure his friends shared in his enjoyments.
43. Ramón Vasconcelos, whose 1916 book (El general Gómez y la sedición de mayo) is cited in Charles E. Chapman, A History of the Cuban Republic: A Study in Hispanic American Politics (New York: The MacMillan Co., 1927), 286.
44. Lt. Col. Avelino Sanjenís, quoted by Chapman, History, 289.
45. This was a private bank, although it held government deposits.
47. Leland H. Jenks, Our Cuban Colony: A Study in Sugar (New York: Vanguard Press, 1928), 247.
48. This is an estimate by Carlos Rafael Rodríguez, a Communist Party leader who served in Batista’s cabinet, given to historian Hugh Thomas. Thomas, Cuba, 736.
49. Susan Rose Ackerman, Corruption and Government: Causes, Consequences, and Reform (Cambridge: Cambridge University Press, 1999), 120.
50. Thomas, Cuba, 758, citing Arthur Gardner, who in 1948 worked for the U.S. Treasury. He later became ambassador to Cuba.
51. World Bank, Report, 487.