It is the goal of all governments to increases the welfare of its citizens as much as possible. The economic system that the government chooses to implement will have sweeping short and long run consequences to the abovementioned goal. It is advantageous, then, to gather empirical information before implementing an economic system.
For empirical purposes, countries chosen to compare economic performance should have distinctly different economic systems. Since no country has a purely “planned” or “market” economy, gathering information on each should assist governments on what mixture of the two is most beneficial. Also, the countries should be similar other aspects (such as geography, natural resources, etc.) in order to make a more fair comparison. The Latin American nations of Cuba and Chile fit these criteria. As will be elaborated further, Cuba’s economy is one of the most centralized and planned systems in the world. Chile, conversely, has very liberal economic policies and is driven primarily by the market. These two approaches will be investigated and compared within a specific time frame.
As mentioned above, social welfare is the primary goal for rational governments. For example, improving such statistics as life expectancy, literacy, infant mortality and unemployment are crucial. Although solving the majority of these issues is also the subject of governmental actions, this paper will go further into examining the mechanisms for economic growth itself, mainly how capital is accumulated and allocated. Without the proper economic growth, these welfare decisions have no hope of being addressed.
The island nation of Cuba (population 11.1 million in 1995) is located a mere 90 miles from Key West, Florida. It became a target for imperialism due to its location and endowments of natural resources. The island was discovered by Columbus in 1492 and alter ruled by the Spanish from 1511 all the way to 1898. Several attempts at rebellion failed such as the Ten Years War (1868-1878) and ‘Cuba Libre’ (1898) lead by famous poet Jose Marti.
The explosion of the USS Maine in Cuba’s harbor on February 15, 1998 initiated the Spanish-American War. The result of this conflict was the forming of the Republic of Cuba in 1902 after a temporary occupation by the United States. The Platt Amendment of 1901 gave the U.S. some powers in assisting Cuban policies as well as a 99-year lease on the Naval base at Guantanamo Bay.
Fulgencio Batista won control of Cuba in a U.S. backed revolt in 1933. Batista’s regime resulted in internal decay, dominated by corruption, manipulation, assassins and unemployment (encyclopedia brit). The stage was set for another takeover, this time by the communist leader Fidel Castro assisted by Che Guevara (who will be further discussed below)
The long and narrow country of Chile is noted for its diversity. With a population of over 12 million, Chile’s width is on average only 110 miles wide. The northern, desert region is known for its mineral production (copper is a major Chilean export). The economic, political and agricultural core of the nation is located in the center, while the south is noted for only the raising of sheep.
Like Cuba, the Spanish initially colonized Chile and a small elite led its initial development. But unlike many Latin American nations, Chile did not depend heavily on mining and agriculture but also developed manufacturing, which also led to the creation of a middle class. When Chile took over the rich nitrate area near Bolivia, it expanded both its mining and industrial industries.
Since it’s independence in 1818, Chile is a democratic, representative government except for a period of military rule from 1973-1990 (the subject of this paper). Their 1925 constitution created some of the most progressive social reforms in Latin America, including the separation of church and state and presidential elections.
Left wing parties formed the “Popular Unity” movement in 1969, shortly followed by the election of Marxist President Salvador Gossens in 1970. He envisioned Chile’s transition to socialism coming through foreign capital, agrarian reform and the redistribution of income. This nationalization led to high inflation, an enormous economic decline, and the takeover of the military leader Augusto Pinochet (further discussed below).
III. Important Figures
No figure in Cuba, or for any Latin American revolutionary for that matter, elicits a great emotional reaction than Che Geuvara (6/28-10/67). Born in Argentina, his early education included reading the works of Marx, Engels and Freud from his father’s library. Che also suffered from asthma, which later propelled him to become a medical student. In his extensive traveling, Che encountered refugees from both the Spanish Civil War and the left-wing dictatorship of Peron in Argentina. His experiences encountering these refugees left Che with a permanent feeling of contempt for parliamentary democracy, military politicians and the army, capitalist oligarchy, and most of all United States imperialism.
After watching the CIA overthrow president Jacobo Arbenz in Guatemala, Che noted that revolution could only be made through armed insurrections. He was taught Mao-like guerilla warfare techniques in Mexico alongside Cuban refugees Rual and Fidel Castro. After Fidel’s takeover in Cuba, Che was second only to Castro in the hierarchy. Organizing and directing the ‘Instituto Nacional de la Reforma Agraria’ (to administer agrarian reform), and presiding over the Department of Industries and the National Bank of Cuba, it is commonly believed Che pushed Cuba too fast into communism. He began moving even farther to the political edge, even embracing anarchism, which prompted Fidel to finally drop Che completely. Che Guevara is most known in Latin America for his romantic appearance, dashing style, brazen and violent actions, and never bowing to authority.
Apart from ‘violent actions’, no adjectives could be farther from reality in describing the Chilean dictator Augusto Pinochet (11/15-??). A careerist in the military with no political aspirations whatsoever, Pinochet eventually lead the undemocratic military junta that overthrew the socialist government of Salvador Allende on September 11, 1973. The Marxist Allende had taken no time in instituting radical economic changes such as land reform and nationalizing business. These policies were initially popular with the poor but detested by the previous ruling elites and middle class. The policies also led to a nearly complete economic collapse, including a 60% inflation rate and plummeting production.
As violence began to erupt, Allende hired Augusto Pinochet to head the military garrison in Santiago to squelch the rioting. Although he was allied with anti-Allende forces, Allende named Pinochet Commander in Chief. Three weeks later Pinochet lead the military coup that left Allende dead (officials falsely claimed he committed suicide). Along with sweeping economic reforms (privatization and other free market policies), more than 100,000 leftists were imprisoned, 2,000 executed and 1,200 disappeared completely. The military rule was an overwhelming economic success, but it’s also infamous for its political terror and repression of human rights.
IV. Economic Systems
On a whole, the economic systems for these two nations are drastically different. By first examining the processes by which the economies evolved will give a solid foundation for more recent analysis. For both countries, a specific time frame was chosen in which to make the most in depth analysis. Although the prices of their exports may have changed in dissimilar ways, the constant time frame lends itself to some degree of fairness as they face exactly the same conditions in the global economy.
Both countries in the mid to late 1980’s were instituting economic reforms. What is most interesting about this period is the fact that both systems were moving farther away from each other, i.e. Cuba expanded nationalization while Chile reprivatized. It will be shown even further that the resulting economic performance from these policies had drastically different results.
Cuba in the 1950’s had one of the leading economies in Latin America but suffered from low growth, unemployment and a growing cleavage in society. They also were depending heavily on sugar exports and the U.S. for investment and trade. The 1959 revolution saw many Marxist ideas come to reality including collectivization of the means of production, central planning, and an emphasis on industry. Sharecroppers, tenant farmers and squatters were given land rights and large estates were turned into state farms or cooperatives. But by 1962, the existing capacity was exhausted creating a need for capital investment. The government had no money, though, because of social expenditures, defense against the U.S., and a lack of infrastructure (Zimbalist 9). Again, Cuba was hurt by trading sugar and with the U.S.S.R. itself (due to the U.S. embargo). Russian equipment was more costly and inferior to U.S. goods and had higher transportation costs (Zimbalist 9).
The second half of the 1970’s Cuba introduced her first 5-year plan. The reform was give the name “New System of Economic Management and Planning” (SDPE) and was modeled after the 1965 Soviet reform. The plan was basically to reintroduce central planning with some market tools to increase capital efficiency. Cubans found the system to be too centralized and inflexible, and innovations in ’76 and ’80 that allowed greater decentralization where implemented too rapidly and caused instability (Zimbalist 15).
The “Rectification Process” (RP) from 1986-90 sought to abolish almost all private sectors. Castro had complete control of the economy, but the recentralization of decision-making was made in conjunction with a decrease in central planning. The result was such policies as further vertical merging of state enterprises, “[with] profits subordinate to the ‘national interest’ but he [Castro] did not operationalize the latter into indicators” (Mesa-Largo 269). During the RP, material incentives to workers were completely removed and moral incentives expanded.
Figures for how nationalized the Cuban economy became are striking. Similar to the Soviet Union in 1959 and Bulgaria in 1956 (although to an even greater degree), industry, construction, transportation and finance were all 100% nationalized industries. But the numbers are most astonishing with respect to agriculture. The Soviet Union (1959) and Poland (1960) each had 14% and 8% agricultural nationalization respectfully while Bulgaria (1956) had only 6%. Cuba in 1988, on the other hand, had 92% of agriculture nationalized (Mesa-Largo 336).
The result of the RP was the worst crisis since the Revolution. Even though exogenous factors such as the communist collapse also had disastrous effects, the fall occurred even before the 1990’s, pointing only to the RP to blame for the initial decline. The National Bank published reports on GDP for the period from 1986-89, showing average GDP at –1.3% and per capita GDP at –2.3% (Mesa-Largo 281). All output targets during this time were unfulfilled, most by a very large margin. Mesa-Largo points out a major flaw with the RP was that it did not create an “integrated economic-organization model” to substitute for the SDPE, a fundamental problem for a socialist nation (265).
Chile has taken a completely different path than the planning system of Cuba. Roberts Araujo gives a possible explanation in his book as to how such a drastic liberalization could have occurred in Chile with the takeover of Pinochet. He notes that instability (such was the condition during Allende) creates the opportunity for great change because of weakened establishments (34). Another explanation is that a liberal foundation had already been established before the socialist movement.
In the 1950’s, the Catholic University of Chile offered a scholarship program for doctoral students with the University of Chicago (contingent that they return to Chile). The result was a proliferation of so-called “Chicago Boys” in Chilean universities and firms. Along with Pinochet’s policy of hiring the “best and brightest” of their field in the 1970’s, the Chicago school of economics (employing free trade wherever possible) was the main influence in Chilean policy. Their policies included privatization, a reduction of public spending by 50% of GDP, eliminating subsidies to public companies, and creating one of the most open economies in the world (Araujo 36). The Chicago Boys also modernized the legal framework, stock exchange, insurance industries and created institutions such as securities firms, mutual funds and private pension plans (Araujo 37). Although later external shocks nearly killed the economy, it was these policies that laid the groundwork for the financial 1985 reforms of minister Buchi that will be discussed later.
The next stage of Chile’s economic path was a period of recovery from 1984-85 followed by sustained growth from 1985-90. The new team built upon the Chicago Boys’ work in the 70’s, pushing for greater privatization, foreign investment and trade, and expansions of the financial market. Two laws were passed in 1985 that began a system of “popular capitalism.” The system had two main objectives: first, rapid privatization of financial institutions that were previously state-controlled (under Allende) and second, distributing pieces of conglomerates to various private sectors (Mesa-Largo 81). Carmelo Mesa-Largo highlights the prescient thinking of the second objective in that, “If future governments wanted to intervene in or nationalize those enterprises, they would have to face a large number of stockholders” (81). The firms were insured of being distributed fully via 50% of the sales going through the stock market (Mesa-Largo 82).
The economic performance of Chile in this stage is also remarkably different than Cuba’s, with an average annual growth rate of GDP at 6.4%. Not only was overall growth a success in this period, but domestic investment was also promoted to lower dependence on foreign financing, increasing from 2.9% to 17.2% of GDP. Sectors that also will contribute to future growth experienced success, such as the industrial sector and transportation and communications with annual growth at 6.2% and 9.2% respectfully (Mesa-Largo 93).
In the mid to late 1980’s, it is nearly indisputable that Cuba’s nationalized economy was declining considerably while Chile’s market was rising. Areas where this might not be the case are income distribution and public spending. Some amount of inequality is necessary for capitalism to function properly, and certainly Chile took full advantage of this in the 80’s. The Chicago Boys felt that once all of this wealth was obtained, it would be distributed in a “trickle-down” effect (Mesa-Largo 541). Empirical evidence of this policy, especially in the United States in the same period, have proven this idea to be a failure for the market system. On the other hand, Cuba’s egalitarian ideology pushed them to spend a large chunk of government expenditures on social services in order to create greater political incentives to work (Mesa-Largo 541). Unfortunately, such spending in the present will inevitably result in the payment of debts by future generations. Although Chile’s social stratification is much worse at the present time, the welfare of Cuba’s future generations remains to be seen.
V. Capital Markets
Karl Marx’s extensive examination of capitalist markets led him to the conclusion that wealth is created by capital accumulation through the surplus created by labor inputs. Marx describes “Department I” or capital goods as the key growth in an economy (Zimbalist “The Cuban Economy” 74). The next important challenge is how to properly allocate capital for future growth. As previously discussed, it is crucial not only to have positive social policies, but solid investment strategies so future problems can be addressed by the government.
Socialist countries, Cuba included, have a number of qualities that effect their future production: isolation from foreign markets, set prices, difficult incentive issues, full-employment policy, “…and the virtual absence of institutions essential to market-related activities such as banking, accounting, auditing and taxation” (Svejnar and Lopez 324). Money being a passive instrument, it is not uncommon for consumers to hold extra savings because of a lack of goods and services to purchase (Mesa-Largo “Cuba” 325). As explained above, there exists a lack of financial intermediation in a socialist economy. Financial intermediation is critical because it makes all available capital productive through indirect, private investment.
Banking is the primary tool for financial intermediation. Most communist systems overlook the value of the capital market, with only a central bank performing the functions of central and commercial banks (Svejnar and Lopez 330). The lack of bond markets also results in any government deficit resulting in an increase in money supply (Svejnar and Lopez 330). This type of market will lead to unwise investments, such as subsidizing unprofitable firms, or even lacking capital to ventures that may be profitable in the future. Also since the Revolution, many of Cuba’s investment projects have focused on short-term goals rather than long-term accumulation of capital (Zimbalist “The Cuban Economy” 73).
Like the majority of Cuba’s economy, during the RP investment decisions were also more centralized. The result of such a policy was political factors playing a large part in investment decisions rather than productivity estimates. Subsidies to price-controlled consumer goods almost doubled. Castro also set a policy of giving priority to projects still under construction than to new ones. Even Cuban economists themselves have trouble describing exactly how enterprises are financed, since budgetary financing could not account for all new enterprises (Mesa-Largo 270).
Chile’s capital markets, however, are a completely different story, establishing some of the most liberal policies in the world. Chile’s 1980 constitution had a rare, long-term guarantee that did not allow the Central Bank to finance ongoing government expenditures, preventing seignorage. The October 1989 Central Bank Law established the Central Bank as a completely autonomous institution. Except in war, the law prohibits the Central Bank from “directly or indirectly financing” government expenditures, thwarting even future governments from printing money. In fact, Chile has more legal safeguards than the U.S. at stabilizing currency (Araujo 34).
These plans began when the Chicago Boys deregulated the banking industry more than a decade before. That intellectual group took such extreme measures as having none of the following safeguards, credit controls or ceilings, maximum interest rates, reserve requirements, or ceilings on foreign borrowing by banks (Araujo 37). The financial minister in 1985, Herman Buchi, took further measures to ensure investment in Chile’s economy. Through deregulating financial markets to increase capital availability and tax rebates for exports, investment increased 20% relative to GDP (Araujo 37). To prevent public spending from “crowding out” public investment, he initiated a plan of selling small stocks to numerous investors, thereby “recapitalizing” firms (Araujo 37). In order to correct for a previous Chilean economic crisis, Buchi created a, “system of regulation, control, and supervision of transactions in the financial and banking systems” in order to promotes investment without risking instability (Mesa-Largo 86).
Capital markets are just one example of the many fundamental differences in the economies of Cuba and Chile. It is also a fact that Cuban GDP was “considerably” lower than that of Chile during the 1980’s (Mesa-Largo 569). Although the Chilean market has proven to be more effective in attaining economic growth, there are still some policies that Cuba has employed that may be beneficial.
Free market policies will help Cuba in the long run through their efficiency in allocating goods, services and capital. But the transition to a market economy can be incredibly painful and complicated. In the short-run, Cuba must work to stabilize their economy. This means that they must cut down on subsidies to decrease the budget deficit and stabilize their currency thereby inflation.
Empirical evidence has shown Chile to have the necessary institutions for a healthy economy in the future. Their main problem, however, continues to be poverty and other social problems related to a large percentage of the population below the poverty line (illiteracy, infant mortality, etc.). Here Chile may want to implement a selection of Cuba’s vast social services to improve overall welfare.
Araujo, Roberts. The Capitalist Revolution in Latin America. Oxford: Oxford University Press, 1997.
Laban, Raul and Felipe Larrain, “Continuity, Change, and the Political Economy of Transition in Chile,” in Rudiger Dornbusch and Sebastian Edwards, ed., Reform, Recovery and Growth. Chicago: The University of Chicago Press. 1995.
Mesa-Largo, Carmelo. Market, Socialist, and Mixed Economies. London: The Johns Hopkins University Press, 2000.
Preeg, Ernest H. and Jonathon D. Levine. Cuba and the New Caribbean Economic Order. Washington, D.C.: The Center for Strategic and International Studies.
Svenjar, Jan and Jorge Perez-Lopez, “A Strategy for Cuba’s Economic Transformations,” in Carmelo Mesa-Largo, ed., Cuba After the Cold War. Pittsburgh: University of Pittsburgh Press, 1993.
Zimbalist, Andrew and Claes Brundenius. The Cuban Economy. Baltimore: The Johns Hopkins University Press. 1989.
Zimbalist, Andrew and Susan Eckstein, “Patterns of Cuban Development: The First Twenty Five Years,” in Andrew Zimbalist, ed., Cuba’s Socialist Economy Toward the 1990’s. Boulder: Pergamon Journals, Ltd. 1987.
Note: All citations with just (Author x) refer to the first of their books on this list unless otherwise noted