Cuba Vs. China Essay, Research Paper

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Cuba is one of the last actual socialism in a world that has given up on the idea of

state-dominated economies and has started adopting market-based democracy. Cuba is

one of transformation, the growing pains of any such movement, can be seen in China’s present day economic challenges. Though not as revolutionary, the handling of these newest reforms will bear significantly on their success or failure in the future.

Cuba is one of the last actual socialism in a world that has given up on the idea of

state-dominated economies an ; { ?•S ? T› ? ; A *

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Cuba is one of the last actual socialism in a world that has given up on the idea of

state-dominated economies and has started adopting market-based democracy. Cuba is

one of the last orthodox Marxisms in the world. It is led by Fidel Castro, a dictator.

Cuba is starting to have problems with its socialism. Cuba is being influenced by

market forces that are changing its economy and politics. The end of hugh subsidies and

loans from the former Soviet Union and its communist allies has placed the Cuban

government under pressure to reform quickly. The Castro regime has been forced to use

market-based reforms to preserve its absolute control over political power. While the

reform measures are making some economic stabilization, recent attempts to extent the

reforms have been unpopular with the people. Making an uncertain future for economic

and political change in Cuba.

This former socialist country has had to penetrate world markets to earn hard

currency. The loss of socialist subsidized imports, as well as major markets for its exports,

has devastated the Cuban economy. The government is now forced to use hard currency

to pay for imports, Cuba’s foreign exchange reserves are being rapidly depleted,

particularly since it must now pay world-market prices for almost all imports.

Since 1989 overall imports have plummeted more than 60%, representing a

contraction in GDP of over 25%. Most of the lost imports have been essential raw and

intermediate materials, thereby severely depressing industrial production. Excess capacity

in all sectors except agriculture and tourism is now estimated by local experts at more than

80%.

Because of the foreign exchange shortage, Cuba has been getting further into debt.

Although official debt statistics have not been published since 1990, Cuba’s external debt

was estimated at $32 billion in 1991 and now hovers around the $35 billion mark. Worse

yet, most of the debt is poorly structured, creating a tremendous drain on its limited

resources and already depleted foreign exchange coffers. The loss of most of the heavily

subsidized oil from the NIS area, for example, has created severe energy shortages, with

the government forced to import bicycles from China as a substitute for public

transportation. Gasoline is very costly and out of reach of most Cubans, while scheduled

and unscheduled power cuts are now common throughout the island. (”Brown-outs”

continue to damage already antiquated industrial machinery.) Shortages of spare parts and

fuel have also affected the still pivotal sugar industry.

The government reports some progress in a generally poor outlook. One is a

increase in oil exploration and production 1992. The other is the recent decision of the

NIS to sell Cuba additional oil, but still well above the subsidized prices of the

Pre-Gorbachev period. Cuba is far from getting the foreign investment needed to boost its

oil production enough to become self-sufficient in the near future. The island does

continue to receive needed crude from Mexico and Venezuela in line with its bilateral

framework accords with these two countries. However, they are charging Cuba world

market prices, which are currently increasing.

As might be expected, Cuba’s economic crisis is taking its toll on Cuban citizens.

Food rationing has reduced many people to bare subsistence, and malnutrition is now a

problem. Medical supplies are scarce.Unemployment and underemployment in

many urban and industrial areas exceed 50% even by official estimates. Exports of

manpower to Central America and as far as Bolivia and Angola once served as an

important safety valve for the Cuban regime. But such foreign “technical” and military

missions have largely ceased with the end of longstanding civil conflicts in those nations.

As a result of Cuba’s economic difficulties, the black market is now larger than the

legal, state-dominated economy. The Cuban Center for the Study of the Americas

estimates that in the 1990-93 period underground economic activity grew five-fold to

over 10 billion pesos. The legalization of dollar transactions in July 1993 was ample

recognition of the US dollar as the medium of exchange in a large and growing parallel

economy. The Cuban government favors international investment that generates or

conserves badly-needed foreign exchange. Investments in tourism, the oil industry,

pharmaceuticals, medical equipment and computer software receive priority. In mid-June,

a large Mexican group agreed to purchase and run Cuba’s ailing phone company. As

happens elsewhere, the actual capital inflows may, of course, be lower than the amount

registered because of delays in getting the projects from the blueprint to the actual

construction stage. Also, the Cubans are liberally interpreting Decree 50 and other laws

and regulations governing foreign investment.

Due to its need for credit, trade guarantees, import and export financing, credit

card operations and other financial services, Cuba’s financial services sector can be

described as full of potential. Cuba is actively seeking foreign banks and major accounting

firms to establish joint ventures with state-owned firms.

On the other hand, China’s economic system has been reformed both structurally and functionally. Some of the reasons lay in their youth as a communist country, lacking the institutionalism and complete central authority which would have restricted change. The key reasons, though, lay in the manner in which reform was presented, and how the government was modified in advance to accept those changes when they came. China’s economy evolved into the system it is today without radical political reform. The basic structure of their government remains and retains a level of control over how policy is made and where power is distributed. The original design, modeled after the Russian system produced policy and handed down decisions in a one way fashion, with those in lower party and government levels left only to carry out orders and monitor progress. Involvement by those closest to a given facet of the economy was limited, even more so for some than others. China, following in the footsteps of Russia, had focused its economic efforts toward heavy industry. Light industry and agriculture served to support urban, industrialized areas. Foreign trade and foreign investment existed almost solely to feed heavy industry and was under exclusive government control. Political power followed this narrow path, as well. Individuals and government agencies involved with heavy industry reaped the benefits of an economic system which funneled resources in only their direction. If policy was to be made regarding economic change, those select ministries and localities were more actively involved in the process. Nearly all other industries lacked the representation necessary to bear sufficient influence for economic change. Once again, political and economic change flowed from the top down. Successively lower political tiers towed the party line fed to them from the one above. Common sense tells us that this system has its limitations as those at the highest levels of government cannot be well versed on all facets of economy and industry. Their ability to make informed decisions is dependent upon how much they interact with those at lower levels, and by their own political agendas. Delegation of authority was the obvious choice. Allowing those closer to, and better informed about a given process lends itself to effective control of its progress. Central control over disseminated authority remained strong. Shirk used the term delegation by consensus to describe this process of requiring that the level of government below agree with the one above it over a given policy before it can be passed down. While no level of government should be given unchecked rein over policy determination, this limited lower level input so severely that I see it as little better than simply being handed your orders as before. If the lower level organization wished to block a measure, it could by refusing to agree, but that would only throw the measure back to the party leaders to be decided upon and delivered in old style party fashion. Before any real reform could be made, communist leader Deng Xiaoping knew that some political power restructuring would have to be made. The balance of power toward the center and away from the provinces did not lend itself to reforms that did not follow the heavy industry intensive trends of the past. His position gave him the power to look to provinces for political support in exchange for appointments to, and therefore better representation in, the central committee. This was not a new idea, Mao Zedong attempted to use this strategy of decentralization before to a small degree of success. After placing individuals in positions of power, select markets were given the right to sell small amounts of goods domestically at their own prices. In return for the opportunity to participate, these provinces had to pledge support for the political reform. This represents an ingenious method for guaranteeing future political success. Waving the carrot of prosperity, through economic freedoms, in return for the support to wave it at others. Other provinces who see the good fortune of their neighbors view the change as a positive process, and are even more willing participants than those who came before them. Opening markets at startup and providing access to sales abroad followed shortly through special economic zones (SEZ’s). There were four zones set up by Deng Xiaoping for foreign investment with Chinese residing outside the mainland . Ideally, this would present Xiaoping with the opportunity to sell the new idea to the government, on the basis that the select few number of zones would stave off foreign domination of culture and promote foreign trade. Xiaoping persuaded officials to offer preferential treatment for the newly established zones. Exports had to be subsidized with government funds to compensate losses. The major contributor to this was the value placed on the yuan by the Chinese themselves to increase import rates. Later attempts to compensate for this would find China with one rate for domestic and another for foreign exchange. This dual rate system is the major detractor from the success of the SEZ’s and those areas granted similar freedoms in the years after. It is obvious in hindsight that devaluing renminbi rates before aggressively pursuing exports would have aided the new markets tremendously. Of course a closed economy, lacking in past experience in the particulars of exporting may not have had the background knowledge to foresee this as the staggering hindrance that it has become. China still battles against this problem today. It has become the point of much speculation over what will be the future of China’s economy if the matter is not resolved correctly. Rapid devaluation internally to a one rate system stands to damage their economy as a whole, not just in foreign trade. Opportunities to work this dilemma out when both rates had approached similar levels were not taken advantage of. The pressure from countries such as the United States was never so great as it is now, however, giving the Chinese a sense that a solution is urgently needed. Many important economic issues face the Chinese in the coming years, aside from the problems of overvaluation. Many are being caused by the very same practices used to initiate reform. Some markets, freed of restrictions via particularism and decentralization are being found difficult to control by a much more distant party. They may set their own rates and valuation with respect to foreign markets, in some instances with debilitating effect on those set by the government. Central government, dealing with localities through individual agreements, cannot gain control due to a lack of standardization of how these values are set. China’s future success may well depend upon another restructuring of the allocation of power and on finding a better way to control rogue influence from individuals. Divisions of government will have to be guaranteed the ability to enforce such regulations, and treat all markets with an equal hand. China’s past successes have removed the doubt that fueled opposition to opening markets. Thus the need to make lucrative exchanges, be it for political support or monetary gain, seem unnecessary, damaging practices. This leads back to the argument for standards regarding government-market interaction. It also questions the necessity of favoring heavy industry through capital investments. No longer a threat politically to policy change, the idea of diverting funds to other more profitable markets only makes better sense. The institution of better economic control, then, could be at the base of future achievement. When the economy behaves as expected, then plans can be constructed and implemented with fewer variables standing in the way. If that control is not found, then government is at the mercy of the market to determine its own path. It is a reasonable assumption that China will find a way to rein in market control, while still providing the autonomy necessary to allow it to grow efficiently. Just as China did not require major political change to implement reform, nothing leads me to believe that future reforms will require it as well. Coming changes to China’s economy will not be as revolutionary, or likely be met with such opposition as those in the past. I see these changes more as adjustments, fine tuning the present system. Movement in new directions could only be viewed as expansion of the present system, not construction of a new one. Without a doubt, China has attained its goal of a more open economy without the need for radical restructuring politically. The path chosen to pursue that goal was well planned and exercised with caution. The importance of a gradual movement into reform was recognized, as was the need to prepare the provinces in advance for their upcoming changes. Opposition was quieted through monetary and political offering, and later by better representation of beneficiaries in policy making bodies. The importance of maintaining certain controls under the command of central government was recognized as well. All of these factors contributed to the success of this most difficult campaign. The price paid for this

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