The most commonly followed economic system, modern-day capitalism, was based on a framework to secure supply of the key elements required for industry – land, machinery and labor – as disruption in any of these would lead to increased risk and loss for the venture.

Socialists viewed this commoditization of labor as an inhuman practice, and that led to the birth of socialism and socialist economies across a few countries.

But what is a socialist economy? And how does it work? Let’s look at some of these aspects of socialist economies in this article, using the examples of China, Cuba and North Korea -- the key social economies in the present era.

An economic system defines the mechanism of production, distribution and allocation of goods, services and resources in a society/country with defined rules and policies about ownership and administration.

One of the variants is the “Socialist Economy,” which is a financial system based on the public or cooperative ownership of production. A prominent characteristic of the socialist economy is that the goods and services are produced based on usage value (subject to the needs of the society, hence preventing under-production and over-production). This is completely different from the common capitalist economic system, where goods and services are produced to generate profit and capital accumulation, rather than based on their usage and value.

Socialism, similar to communism, advocates that the means of production be owned by the people, either directly or through government agencies. Socialism also believes that wealth and income should be shared more equally among people.

Where Socialism Differs from Communism:

  • It does not favor violent aggression or overthrowing of capitalists by workers.
  • It does not advocate that all private property ownership be eliminated, rather that the gap should be narrowed down, preventing accumulation.

The main goal of socialism is to narrow, but not totally remove, the gap between the rich and the poor. The government, through its agencies and policies, takes the responsibility to redistribute production and wealth, making the society fairer and leveled.

Other Important Characteristics of a Socialist System are:

  • A socialist economy offers collective ownership, either through a state-controlled agency or worker cooperative; or else property/capital might be commonly owned by the society as a whole, with delegation to representatives. Socialist economies discourage private ownership.
  • Goods and services are produced for their usefulness, with the aim to eliminate the need for a demand-based market for products to be sold at a profit. In this way it discourages accumulation, which is assumed to be the root cause of wealth imbalance across the society.

Interestingly, no pure socialist, pure capitalist or pure communist economy exists in the world today. All economic system changes were introduced with a big bang approach and had to make “adjustments” to allow appropriate modifications as the situation developed.

To analyze the socialist economies further, let’s look at the cases of three prominent socialist economies across the globe – Cuba, China and North Korea.

The Cuban Economy

Cuba is one of the most prominent socialist nations, having a mostly state-run economy, a national health-care program, government-paid (i.e. free) education at all levels, subsidized housing, utilities, entertainment and even subsidized food programs. These subsidies compensate for the low salaries of Cuban workers, making them better off than their international counterparts in many other countries. Cuba does not have a stock exchange – a crucial indicator of a capital-free economy. Around 80% of Cuba's workforce is in state-owned facilities.

But how has the Cuban socialist economy evolved and how is it doing currently?

Starting with the modern day and tracking backward, President Raúl unveiled economic reforms in 2010 aimed to shift toward a mixed economy that would allow free-market mechanisms, remove government control of small businesses, lay off unnecessary state workers and make self-employment easier. Why was this change needed in a pure “socialist economy”?

Well, it seemed that state-run subsidies had become insufficient to support the numerous social programs. Despite the enormous aid received from the unified Soviet Union (before it split), there were high poverty levels, a widening gap of rich and poor, and a massive burden on social programs.

As of today, Cuba seems to be better situated with a parallel financial system – one that operates on the usual social programs in common sectors, while operating as a free-market economy in the tourism, export and international business sectors. The latter actually assists the social system. Around 20% of Cuban workers are currently employed in this private sector. On the heels of reports that half a million workers were being laid off, further plans and reforms will allow up to 40% of the government workforce to move into the private sector, enabling the inception of income tax payment, which in turn will lead to more self-reliance.

Introducing better reforms through new laws aimed to bring in higher foreign investment, the changes to the closed “socialist economy” are already on their way to mixing with the market-based open economy. Tax-free special development zones are being introduced for foreign companies to conduct business freely and allow transfer of tariff-free profits abroad, among other benefits. This is a significant change from the central “socialist” planning.

The Chinese Economy

A significant portion of the Chinese economy is still government-controlled, although the number of government programs has declined significantly. Universal health care, for example, is being discontinued. China's foreign policy continues to be pro-socialist, but it has essentially become a free-market economy. In essence, China no longer remains a “pure socialist economy."

Interestingly, the privately owned firms reportedly generate a substantial portion of GDP for China (figures vary from 33% to 70%, as reported by various news sources). After the U.S., China is the second-largest economy in the world, and the number-one largest manufacturing economy.

How has China managed to grow its economic influence?

Effectively, China pulled this off by transitioning from a “socialist economy” to a “socialist market economy.” The communist regime in China quickly realized that it would be to its disadvantage to keep China's economy secluded from the rest of the world. It has been able to successfully strike a balance between the “collective” and “capitalist” approach. Policies allow entrepreneurs and investors to take profits, but within the controls of the state. Around 2004, the government began to allow a person’s right to private property. Establishing a special economic zone and opening up to international trade have allowed the country to embark on fast-paced economic growth – all courtesy to the right changes to the socialist policies at the required time.

The North Korean Economy

North Korea – the world's most totalitarian state – is another prominent example of a socialist economy.

Like Cuba, North Korea has an almost entirely state-controlled economy, and it has similar social programs to those of Cuba. There is no stock exchange in North Korea either.

Around mid-1975, North Korea was better educated and more productive than China (going by international trade per capita). However, North Korea also has the terrible misfortune of being the only educated and developed society in human history to face a mass famine – and during peacetime at that. Interestingly, the country’s hunger problem reportedly has not been resolved. If the tightly controlled socialist economic system had been a success in North Korea, the nation would probably not have deteriorated to this level.

Challenges with North Korea

The discontinuation of major aid (and trade) from the Soviet Union and sanctions by other world powers are significant developments that restrict the Korean economy. However, other countries like Vietnam have managed to improve during the same post-Soviet period, while the North Korean economy declined.

Apart from the challenges of dynastic rule in North Korea, which prevents the country from becoming self-reliant, the campaign of "military-first politics" (in Korean, "Songun Chongchi") imposes a heavy burden on the economy.

North Korea’s only foreign-trade partner is China, and the business is dominated by middlemen who broker the deals between Chinese companies and Korean firms. This has completely closed off North Korea on nearly all fronts.

Recent Developments

Due to a lack of self-sufficient manufacturing facilities and markets in the country and increasing dependency on China, private firms and businesses are on the rise in Korea.

Irrespective of the existing situations and causal factors, the development of parallel “second” markets, where citizens and firms trade or barter for goods and services, are thriving. Indicating a significant shift from the heavily controlled “socialist” economy of North Korea, this parallel system is seeing involvement from all – housewives exchanging unused goods for the ones required, farmers selling their produce locally and an increasing number of firms importing Chinese goods through agents.

Lack of credible official information on North Korea makes it hard to observe the economic development (or lack of it), but available information does point to the existence of a different financial system.

As stated by one scholarly article, “No communist state has ever been able to eradicate private economic activities completely, and despite their persistent efforts, all Leninist regimes have had to tolerate the existence of a 'second economy.’ The second economy operates outside the planning framework, is conducted for private gain and/or involves ‘knowing contravention of an existing law.’ Entities thus engaged may be households, enterprises (including SOEs) or criminal organizations.”

The Bottom Line

Socialist economies across the globe have existed and continue to progress. However, there may not be any standard pure socialist economy remaining. Timely, fundamental shifts in programs and policies have allowed such economies to thrive and flourish – China being the world leader among them. The ones taking a rigid stand are facing severe problems or developing parallel markets.

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