What Is a Socialist Market Economy?

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. 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 socialist market economies.

But what is a socialist market economy? And how does it work? Let’s explore the economies of North Korea and Cuba, along with China, as a case study for the key socialist market economies in the present era.

Types of Socialist Economies

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. This usage value is subject to the needs of the society, hence preventing under-production and over-production. 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 based on their usage and value.

Socialism vs. Communism

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. However, socialism differs from communism in that:

  • It does not favor violent aggression or overthrowing of capitalists by workers.
  • It does not advocate that all private property ownership be eliminated, but 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

A socialist economy also offers collective ownership, usually through a state-controlled agency, worker cooperative, or owned by the society as a whole, 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.

Key Takeaways

  • Contrary to capitalism, socialist market economies produce goods based on usage values, with typically collective ownership shared by entire countries.
  • 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.

How Cuba's Socialist Market Economy Works

Cuba is one of the most well-known socialist economies, having a mostly state-run economy, a national healthcare program, government-sponsored education free for nationals at all levels, subsidized housing, utilities, entertainment, and even subsidized food programs. Together, these social programs 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 80% of its workforce working in state-owned enterprises. Cuba does not have a stock exchange–a crucial indicator of a capital-free economy.

Cuba's Economy Today

Starting with the modern-day and tracking backward, Former 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”?

It seemed that state-run subsidies had become insufficient to support numerous social programs. Despite the enormous aid received from the Soviet Union (before it split), there were high poverty levels, a widening gap between the rich and the 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 the transfer of tariff-free profits abroad, among other benefits. This is a significant change from the central “socialist” planning.

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. Universal health care, for example, undergoes constant reform with a current goal of providing health care to all. 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 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 the years of 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 ten million North Koreans were facing severe food shortages. Over 43 percent 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.

As one scholarly article explains, “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 existing law.’ Entities thus engaged may be households, enterprises (including SOEs) or criminal organizations.”

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.