Will North Korea and Cuba Ever Be Wealthy?

By: MISES

Ryan W. McMaken writes: After years of claiming to embrace revolutionary Marxism, the Cuban state is, for reasons of necessity and pragmatism, moving toward becoming a more traditional authoritarian state. Even once Raul and Fidel Castro are dead, it's rather unlikely that the Cuban government will suddenly turn to a political system that leans heavily in favor of relatively free markets. As has been the case with China, the ruling class of Cuba will find ways to perpetuate itself and maintain political control while keeping for itself a substantial amount of the wealth produced by the labors of the common people. It will likely loosen up on its control of the economy because it recognizes that more-free economies are more productive than less-free economies. But, don't look for Cuba to become a haven for entrepreneurship any time soon.

Even as the economy becomes slightly more free, however, Cuba will remain poorer than most of its neighbors indefinitely, and even if Cuba turned into a Caribbean version of Singapore — something that's exceedingly unlikely — it would remain far poorer than even many of its Latin American neighbors for decades.

This is because, in spite of what our politicians may tell us, people cannot be made more prosperous by the government's simply wishing it to be so. After all, if wealth could be produced by government fiat, then the Cuban and North Korean regimes, neither of which have faced any organized political opposition, have both enjoyed nearly untrammeled power to "improve" the economy without limit.

In real life, though, wealth can only be built through the arduous process of work, saving, and capital accumulation. There is no question that some people can benefit from government mandated redistribution of wealth, but to have wealth, it must first be created by producing things or services of value, and by foregoing consumption now in order to invest and obtain more consumption later.

It's easy to state this, but it is far more difficult to actually do it. And most frustrating of all: even after a society embraces relatively free markets, it can still take decades to achieve a wealthy society by modern standards. And worse yet: in the process of building wealth, many ideologues and politicians will point to the discrepancy between rich and poor countries and blame markets.

The Case of East Germany and Eastern Europe

While there is no such thing as a truly controlled experiment in the fields of economics or politics, we do have some cases that convincingly demonstrate how political revolutions are insufficient to effect an economic one all by themselves.

For example, even 25 years after the fall of the Berlin Wall, the areas of Germany that once groaned under the soviet-style regime known as the German Democratic Republic remain poorer than the areas of Germany that once formed what was commonly called West Germany.

In 2014, the Washington Post reported how East Germany has lower levels of disposable income, high unemployment rates, and is generally less prosperous. This in turn has led to the old East Germany having fewer young people, many of whom move west for better jobs.

Fortune's Chris Matthews went on to observe "If you look at statistics such as per capita income or worker productivity, they also point to the large disparity in economic development between east and west."

And Claudia Bracholdt further notes: "Today, Germany’s east has many structural problems similar to those of countries like Greece and Spain, though on a much smaller scale."

During the Cold War, numerous opponents of Communism pointed to Germany as the perfect example of how soviet-style communism destroyed economic prosperity. But that was then. Nowadays, the East German regime is gone, and Germany is, relatively speaking, one of the most market-oriented economies on earth. Eastern Germany shares a government with western Germany. So, why is eastern Germany still poor compared to its western German neighbors?

The answer lies in the fact that even though the legal and political systems in eastern Germany are the same as in the West, the East suffers from the fact that it lost out on decades of capital accumulation and growth in worker productivity while under the boot of the Soviets.

The German case offers the most excellent comparison of course, because prior to World War II, western and eastern Germans enjoyed similar political systems for many decades. Moreover, the western and eastern Germans were similar both ethnically and culturally. Thus, the comparison allows us to focus on regime differences in the age of the Cold War.

We can look beyond just the East Germans as well. We might ask ourselves, for example, why Poland, with its Western orientation and long tradition of parliamentary and decentralized governments remains so relatively poor.

The same might be said of the Czech Republic as well, where the principal city, Prague, was once the second city of the Austrian Empire and was a center of European wealth and culture. The Czechs too, have never regained their relative place in terms of European wealth.

Part of the explanation lies in the fact that the legacy of an abandoned political system can live on for decades even after regime change. As Nicolás Cachanosky has observed in the context of South American regimes:

Institutional changes ... define the long-run destiny of a country, not its short-run prosperity. ... For example, as China opened parts of its economy to international markets, the country started to grow, and we are now seeing the effects of decades of relative economic liberalization. It is true that many areas in China continue to lack significant freedoms, but it would be a much different China today had it refused to change its institutions decades ago.

Clearly, the fact that the old Eastern Bloc countries have moved toward liberalization has set those countries on a path toward greater economic prosperity. That by itself, however, cannot put it on a par with countries that never suffered the effects of decades of communism.

Korea: An Extreme, but Relevant, Example

This will become all the more obvious if and when North Korea's regime collapses, at which point it is likely to be absorbed into South Korea. When that happens, we will then be looking at a country in which the northern areas, in spite of an identical ethnic makeup and an extremely similar long-term history, will be much, much poorer than the southern areas.

Some Germans to this day are resentful of how much in taxpayer wealth poured out of the west into the east. But that will look like nothing compared to the taxpayer wealth that will flow from the South to the North following a reunification of Korea. As the BBC observed:

Incomes in South Korea are 10 to 20 times higher than they are in North Korea — a much bigger gap than that between East and West Germany. That means that if reunification happened, the economic jolt would be much, much greater.

Already, North Koreans who defect find that their skills aren't adequate for South Korea. Doctors who defect from the North often fail to pass standard South Korean medical exams. This all indicates that the immense effort and money required for reunification would dwarf the scale of the task in Germany.

Under such a scenario, all the same issues found in Germany would be magnified many times over in Korea. Younger workers would flock to the south in search of work and education. The North would become a land of impoverished pensioners living off social benefits paid for by southern workers. Only over many decades would capital slowly move north, and North Korea might even take on the characteristics of a frontier state where the economy is based largely on resource extraction, and where labor must be imported from other parts of the country, or even from abroad.

Certainly, this process could be sped up by forced transfers of wealth and capital paid for by the South, but this would of course come at great cost to the southern Koreans.

The Political Backlash

But even when it is self evident that market systems bring greater wealth and prosperity, such changes in Korea and Cuba will bring a political backlash, just as happened, to a certain extent, in Eastern Europe. The social ills present in the newly Westernizing countries will be blamed on "excessive capitalism" as workers migrate to follow capital, leaving behind a hollowed-out economy in the formerly communist areas. Since wealth cannot be made to magically appear everywhere at once, significant poverty will still persist in many areas, but now, instead of being blamed on domestic bourgeois reactionaries, it will be blamed on capitalism in general, and now, the the actual presence of capitalism will make the argument far more convincing. The relative poverty of the old communist areas will endure, in spite of immense gains in standards of living. Capitalists will be blamed for these inequalities as well. As Andrei Lankov wrote in the Korean context:

Affluence and poverty are, essentially, relative categories. There is little doubt that in the first years that follow unification, the average North Korean assembly line worker or rice farmer will compare their new lives with what had been the norm under the Kim family — with such comparisons being decisively in favor of the new system. However, it is only a matter of time, perhaps merely a few years, before the focal point shifts to the contemporary South. North Koreans will begin comparing their lot not with their pre-unification past, but with South Korea’s present, and these comparisons are not going to be very favorable or seriously encouraging.

In other words, scratching out a subsistence under the North Korean regime will be replaced by a drive to keep up with the Joneses. With it will come nostalgia for a "simpler" time and a drive to blame capitalism, yet again, for persistent inequality. The lessons of what prevented affluence in the first place will be quickly forgotten.

Something similar is likely to happen in Cuba. If Cuba continues to slowly liberalize (economically, if not politically) it will nevertheless remain far poorer than the United States, and also Mexico, Chile, and all the so-called "Pacific Pumas" that continue to move toward more market-based economic systems in Latin America.

Consumed by the perceived inequality, the Cubans will then demand "change," but rather than liberalizing further, they may instead go down the path of Venezuela looking to yet another quick fix in what could unfortunately be a nearly endless cycle.

Ryan W. McMaken is the editor of Mises Daily and The Free MarketSend him mail. See Ryan McMaken's article archives.

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