A nation's economic system defines its mechanism for the production, distribution, and allocation of goods, services, and resources.

The modern world's most commonly followed economic system, capitalism, allows individuals to own the industries that produce and distribute the goods and services that the population requires. Workers, in turn, contribute their skills in return for money to buy their share of those goods and services.

Socialism, the main alternative economic system that has emerged in modern times, requires that the means of production, distribution, and exchange be owned and regulated by the community as a whole. In practice, that means it is owned and regulated by the government.

A prominent characteristic of the socialist economy is that the goods and services are produced based on usage value. This usage value is subject to the needs of the society, hence preventing underproduction and overproduction.

This is completely different from the common capitalist economic system, in which goods and services are produced to generate profit and capital accumulation, rather than being based on their usage and value.

A socialist market economy is a system of government that attempts to strike a balance between pure capitalism and social welfare. Let’s explore the economies of North Korea, Cuba, and China, as a case study for the key socialist market economies in the present era.

Key Takeaways

  • Contrary to capitalism, socialist market economies produce goods based on usage values, with collective ownership shared by the entire country.
  • In socialist economies, governments are charged with redistributing wealth and narrowing the gap between the poor and the rich.
  • While no modern-day countries are considered to have a "pure" socialist system, Cuba, China, and North Korea have strong elements of socialist market economies.

Socialism vs. Communism

Both communism and socialism are based on a vision of a classless society in which goods and services are shared equitably. In both, the means of production and distribution are owned by the workers, either directly or through government agencies.

Socialism can be compatible with individual liberty, democratic government, and freedom of choice. Communism is imposed by an authoritarian state in which individual rights and liberties are held to be inferior to the rights of the people as a whole.

Most advanced democracies contain some elements that could be termed socialist. Nationalized healthcare, mass transit systems, and even public libraries all are examples of government services that are owned and run by government agencies, subsidized by taxpayers, and available to all.

Communism calls for the elimination of private property ownership and thus effectively abolishes wealth accumulation. Socialism calls for public ownership of essential services and levies the high taxes that are needed to support them. The gap in the quality of life between the richest and the poorest narrows.

The two biggest experiments in communism in the 20th century were the Union of Soviet Socialist Republics (U.S.S.R.) and the People's Republic of China. The U.S.S.R. collapsed in 1991. China remains a one-party state, and that state is the Communist People's Party. Nevertheless, it has introduced government reforms that have made its system a hybrid of communism and socialism with a dash of pure capitalism.

Other Important Characteristics of a Socialist System

A socialist economy offers collective ownership, usually through a state-controlled agency, worker cooperative, or outright state ownership with delegation to representatives. Socialist market economies generally discourage private ownership.

In addition, in socialist market economies, goods and services are produced for their usefulness, with the aim to eliminate the need for a demand-based market. In this way, it discourages accumulation, which is assumed to be the root cause of wealth imbalance.

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.

How Cuba's Socialist Market Economy Works

Cuba has a mostly state-run economy including a national healthcare program, government-sponsored education free for its citizens at all levels, subsidized housing, utilities, entertainment, and even subsidized food programs. Together, these social programs are meant to compensate for the low salaries of Cuban workers, making them better off than their international counterparts in many other countries.

As a socialist economy, Cuba has a primarily planned economy with around 88% of its workforce working in state-owned enterprises, as of December 2017. Cuba does not have a stock exchange; a crucial indicator of a capital-free economy.

Cuba's Economy Today

Former President Raúl Castro 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”? The reason is that Cuba's economy was in disarray. GDP was registered at 2.4% per year with stagnation at 2% per year during Raul Castro's presidency from 2008 to 2018. This ends up being less than the 5% annual growth needed in Cuba to sustain growth. In addition, the country has experienced shortages of consumer staples, energy rationing, and price inflation.

As of today, Cuba operates with a parallel financial system; one that operates on the usual social programs in critical sectors while allowing a free-market economy in the tourism, export, and international business sectors.

Cuba's economy has also suffered greatly from U.S. sanctions on the country.

As of 2017, 12% of Cuban workers were employed in the private sector. The private sector in some shape or form provides income and jobs to four out of 10 Cubans of working age.

The country has continued to introduce reforms through new laws aimed at bringing in higher foreign investment, which was a shift from being a complement of the economy to an essential part of it. It is clear that Cuba has moved away from its socialist economy to one that focuses on implementing capitalist structures.

How China's Socialist Market Economy Works

A significant portion of the Chinese economy is still government-controlled, although the number of government programs has declined significantly. Healthcare expenses, for example, are covered for 95% of the population through three public insurance programs. 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: 60%, as state-owned enterprises only contribute 40%. 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 transitioned 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. Since then, 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.

How North Korea's Socialist Market Economy Works

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, with 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 (based on international trade per capita). However, the economic and social situation has been precarious in North Korea since a massive famine hit the country between 1994 and 1998.

Today, many world powers have discontinued aid and trade with North Korea due to the many human rights abuse allegations of the totalitarian government. These sanctions by other world powers have significantly restricted any economic development of the North Korean economy.

Apart from the challenges of dynastic rule in North Korea, which prevents the country from becoming self-reliant, the campaign of "military-first politics" also 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.

In May of 2019, the United Nations estimated that 10 million North Koreans were facing severe food shortages. Over 43% of the population is suspected to be undernourished.

Recent Developments in North Korea

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 North 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 thereof), but available information does point to the existence of a different financial system.

The Bottom Line

Socialist market economies across the globe have existed and continue to progress. However, there may not be any standard of a pure socialist economy remaining. Over time, many world leaders that previously identified under the umbrella of socialist economies have now bent towards capitalist-shifts in programs and policies; China being the leader among them. The ones taking a rigid stand are facing severe problems or developing parallel markets.