One, Che Guevara, the well-known Argentinean revolutionary, was the architect of Cuba’s communist economic system. The other, Sir John Cowperthwaite, was born in Britain and is largely unknown today. He was central to Hong Kong’s post-war recovery and to its unique laissez-faire economic policy. Both were avid students of economics, but whereas Guevara looked to the German historian Karl Marx, Cowperthwaite looked to the Scottish economist Adam Smith.
Guevara and Cowperthwaite are the originators of one of the most significant natural economic experiments of the last century, pitting the relatively free-market model of Hong Kong against the state interventionism of Cuba. Each territory has faithfully pursued its economic model for over half a century, thus giving us a unique read on the models’ link with progress and prosperity. Given that change in both territories may be in the air, now is the time to assess their respective performance.
Hong Kong and Cuba had similar GDP per capita in 1960. Since then, Hong Kong’s has grown 14-fold, Cuba’s just twice, leaving Hong Kong seven times more prosperous than Cuba. In 1960, Hong Kong’s GDP per capita was a third of its old mother country, Britain. Now, it is 40% higher, matching the United States and Switzerland. And progress on other measures such as longevity and education, have followed economic performance. Since World War II, Hong Kong may be the best example of economic development yet seen.
North versus South Korea, East versus West Germany, and China versus Hong Kong, Singapore and Taiwan, all indicate there is something in the communist approach that impedes economic growth. China’s different growth path before and after Deng Xiaoping’s economic reforms, and the fact that of the more than 40 economies using central planning in 1960 only two do so today, provide further confirmation that communist economic planning and progress do not mix. But why, more specifically, did Cuba fail, and Hong Kong succeed?
Consider the way that business has been conducted in the two economies. Imagine being a worker in Hong Kong or Cuba. In Hong Kong, you could easily change jobs if another business was growing and paid more. In Cuba, you could only go to a job sanctioned by the government. With wages set by the state in tight bands, there would probably be no salary increases. With little incentive to progress, you might instead opt for a job that was not too strenuous. Not surprisingly, tough jobs, such as sugar cane cutters have repeated shortages of workers, badly affecting Cuba’s output.
Say that you were promoted to become a supervisor. You would be well-placed to identify ways to make production more efficient. But would you bother? In Hong Kong, you would see it as part of your job, would probably share in any upside and might be promoted. You might even have the authority to make such changes yourself.
But in Cuba, you would probably keep quiet. There would be little benefit for you. Business managers’ prime job is following the state plan and they would have little interest in proposing improvements. And there are numerous committees and officials that would need to be convinced before any changes could be made. Indeed, there could be political risk in such moves – for you and for others. Unsurprisingly one study in the 1970s revealed that between a quarter and a half of all the hours worked in Cuba were wasted and unproductive, whereas Hong Kong has had outstanding productivity.
And it is not just labour that is unproductive. Business owners in Hong Kong ensure that their assets are well cared for and well utilised. For example, Hong Kong’s success in textiles came in part from using modern equipment three shifts a day. In Cuba, business assets are misused, even abandoned. Cuba’s former dictator Fidel Castro himself expressed his frustration, citing how tractors that had lasted twenty years when privately owned, lasted only three or four years under state ownership. Poor training, maintenance, quality and distribution all combine to lower the returns on assets in Cuba.
Even worse has been the misallocation of investments in Cuba. The state decides which businesses to invest in and which to close. In reality, few businesses close, even when they are unprofitable. In the 1960s, the central planners aimed to grow a steel industry, a motorcycle industry, a glass industry and 200 other priority sectors. Most failed and almost all were uncompetitive.
In Hong Kong, business owners decide where to invest. They do the research, raise the capital, and make or lose money according to their acumen. Being an open economy, companies need to be globally competitive. And when businesses lose their competitive advantage, they are quickly closed, thus releasing resources to other growing sectors. Imagine the power of thousands of people assessing such opportunities versus the central planners and their spreadsheets.
Cuba and Hong Kong illustrate the compound effect over six decades of state planning versus market forces. Centralisation of economic decisions looks deceptively efficient. But, paradoxically, it is by delegating power and increasing economic freedom that human progress is best served in a complex and changing world.
Neil Monnery is the author of the book A Tale of Two Economies. Hong Kong, Cuba and the two men who shaped them.
This article was originally published on Human Progress.