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01 / 05
Monnery: Human Progress in Cuba and Hong Kong, Pt. 3

Blog Post | Economic Growth

Monnery: Human Progress in Cuba and Hong Kong, Pt. 3

A six decades-long natural experiment in delivering human progress in Hong Kong and Cuba.

As the world entered the turbulent 1960s, two men, half a world apart, one a doctor and the other a classicist, both foreigners far from home, were charged with bringing human progress to their adopted countries. More than half a century later, their principles still drive the policies of those economies today. They held a common objective. Both were determined to create a better world for their people. But their proposed solutions could not have been more different.

One, Che Guevara, the well-known Argentinean revolutionary, was the architect of Cuba’s communist economic system. The other, Sir John Cowperthwaite, was born in Britain and is largely unknown today. He was central to Hong Kong’s post-war recovery and to its unique laissez-faire, free-market economic policy. Both were avid students of economics, but whereas Guevara looked to the German historian Karl Marx, Cowperthwaite looked to the Scottish economist Adam Smith.

Guevara and Cowperthwaite are the originators of one of the most significant natural economic experiments of the last century, pitting the free-market model of Hong Kong against the state interventionism of Cuba. Each territory has faithfully pursued its economic model for over half a century, thus giving us a unique read on the models’ link with progress and prosperity. Given that change in both territories may be in the air, now is the time to assess their respective performance.

Hong Kong and Cuba had similar GDP per capita in 1960. Since then, Hong Kong’s has grown 14-fold, Cuba’s just twice, leaving Hong Kong seven times more prosperous than Cuba. In 1960, Hong Kong’s GDP per capita was a third of its old mother country, Britain. Now, it is 40 percent higher, matching the United States and Switzerland. And progress on other measures such as longevity and education, have followed economic performance. Since World War II, Hong Kong may be the best example of economic development yet seen.

North versus South Korea, East versus West Germany, and China versus Hong Kong, Singapore and Taiwan, all indicate there is something in the communist approach that impedes economic growth. China’s different growth path before and after Deng Xiaoping’s economic reforms, and fact that of the more than 40 economies using central planning in 1960 only two do so today, provides further confirmation that communist economic planning and progress do not mix. But why more specifically did Cuba fail, and Hong Kong succeed?

Consider the way that business has been conducted in the two economies. Imagine being a worker in Hong Kong or Cuba. In Hong Kong, you could easily change jobs if another business was growing and paid more. In Cuba, you could only go to a job sanctioned by the government. With wages set by the state in tight bands, there would likely be no salary increases. With little incentive to progress, you might instead opt for a job that was not too strenuous. Not surprisingly, tough jobs, such as sugar cane cutters have repeated shortages of workers, badly affecting Cuba’s output.

Say that you were promoted to become a supervisor. You would be well-placed to identify ways to make production more efficient. But would you bother? In Hong Kong, you would see it as part of your job, would likely share in any upside and might be promoted. You might even have the authority to make such changes yourself.

But in Cuba, you would probably keep quiet. There would be little benefit for you. Business managers’ prime job is following the state plan and they would have little interest in proposing improvements. And there are numerous committees and officials that would need to be convinced before any changes could be made. Indeed, there could be political risk in such moves – for you and for others. Unsurprisingly one study in the 1970s revealed that between a quarter and a half of all the hours worked in Cuba were wasted and unproductive, whereas Hong Kong has had outstanding productivity.

And it is not just labor that is unproductive. Business owners in Hong Kong ensure that their assets are well cared for and well utilized. For example, Hong Kong’s success in textiles came in part from using modern equipment three shifts a day. In Cuba, business assets are misused, even abandoned. Cuba’s former dictator Fidel Castro himself expressed his frustration, citing how tractors that had lasted twenty years when privately owned, lasted only three or four years under state ownership. Poor training, maintenance, quality and distribution all combine to lower the returns on assets in Cuba.

Even worse has been the misallocation of investments in Cuba. The state decides which businesses to invest in and which to close. In reality, few businesses close, even when they are unprofitable. In the 1960s, the central planners aimed to grow a steel industry, a motorcycle industry, a glass industry and 200 other priority sectors. Most failed and almost all were uncompetitive.

In Hong Kong, business owners decide where to invest. They do the research, raise the capital, and make or lose money according to their acumen. Being an open economy, companies need to be globally competitive. And when businesses lose their competitive advantage, they are quickly closed, thus releasing resources to other growing sectors. Imagine the power of thousands of people assessing such opportunities versus the central planners and their spreadsheets.

Cuba and Hong Kong demonstrate the compound effect over six decades of state planning versus market forces. Centralization of economic decisions looks deceptively efficient. But, paradoxically, it is by delegating power and increasing economic freedom that human progress is best served in a complex and changing world.

More from this series:

Part 1: Hong Kong

Part 2: Cuba

Author

  • Neil Monnery has recently published "A Tale of Two Economies: Hong Kong, Cuba and the Two Men who Shaped them (2019)." He previously wrote "Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong (2017)." He studied at Exeter College, Oxford, and at the Harvard Business School. Between 1983 and 2004, he worked at The Boston Consulting Group as a Director and Senior Vice President. He was Group Strategy Director of WH Smith between 2004 and 2014 and Chairman of Smiths News. He is a Director at Ashridge Strategic Management Centre.

The Economist | Macroeconomic Environment

America Is in the Midst of an Extraordinary Startup Boom

“Last year applications to form businesses reached 5.5m, a record. Although they have slowed a touch this year, the monthly average is still about 80% higher than during the decade prior to covid, compared with just a 20% rise in Europe. Startups normally play an outsized role in creating employment in America, as elsewhere. By definition, every startup job counts as new, whereas mature companies have more churn. That difference has become even starker. In the four years before the pandemic, established firms added one net job for every four created by startups; in the four years since the pandemic, established firms have actually lost one job for every four created by startups.

Perhaps even more important than the numbers is the kind of ventures that are being created. In 2020 and 2021 many startups catered to the working-from-home revolution. These included online retailers, small trucking firms and landscapers. Since mid-2022, however, the baton has been passed to technology firms, according to Ryan Decker of the Fed and John Haltiwanger of the University of Maryland. A paper published in March by the Census Bureau found a particularly sharp increase last year in business applications based around artificial intelligence. For researchers, this carries echoes of the 1990s, when computers and the internet took off.”

From The Economist.

Blog Post | Economics

Javier Milei and the Future of Latin America | Podcast Highlights

Chelsea Follett interviews Daniel Raisbeck about the recent election of Javier Milei and what it means for the future of Argentina and the rest of Latin America.

Listen to the full podcast episode or read the full transcript here.

What are some of the most promising events in Latin America today?

Of course, the election of Javier Milei. He took office on December 10th, and it’s all quite encouraging. He had a large decree that repealed many laws and modified others to liberate the Argentine economy, which is currently one of the most regulated economies in the world.

It will depend, of course, on congress and the courts which can potentially block many of his initiatives. Here at Cato, my colleague Gabriel Calderon and I have focused on his main proposal: the dollarization of Argentina’s economy. In general, we think it’s a very good policy, but in that respect, I’ve been disappointed with the beginning of Milei’s government. We can discuss that further if you like.

First, let’s set the stage. Could you describe the situation in Argentina before Milei?

Well, the main problem was inflation, which was around 140 percent at the time of his election in November. And, of course, this is caused by the central bank. Argentina’s central bank is particularly irresponsible even within a Latin American context. Argentina also has one of the most regulated economies in the world. Forty percent of the population is living in poverty, and its economy hasn’t grown in over a decade.

This is especially sad because Argentina was incredibly successful in the 19th century. Its 1853 constitution was drafted based on the ideas of a classical liberal author called Juan Bautista Alberdi, who basically called for free trade, unrestricted industry, free immigration, and infrastructure to connect the country. And that’s what they did. It wasn’t immediate; it took a few decades, but from 1880 to 1916, you had this very successful export model that made Argentina into one of the richest countries in the world. Then, in 1916 and 1920, with everything that was happening in the world, nationalism took hold in Argentina and eventually morphed into Peronism, which is the standard, prototypical Latin American corporatist ideology. There has been a very clear decline ever since.

Could you talk more about Milei’s political beliefs?

Milei describes himself as a classical liberal or a libertarian and even as an anarcho-capitalist. He was actually trained as a neoclassical economist, but he relatively recently became an adherent of the Austrian School. And he’s been very open about it. He has never tried to soften his stances to appease some section of the electorate. He is also very talented at explaining economic concepts like the causes of inflation or the effects of regulation in a way that the public can understand.

Can you talk a little bit about the classical liberal tradition in Argentina?

Argentina has many classical liberal economists. At a per capita level, it’s probably the highest percentage in Latin America. They also have a long tradition of think tanks beginning in the 1950s. One particular think tank was started by a gentleman called Alberto Benegas Lynch, who corresponded with Ludwig von Mises and Friedrich Hayek. So, Argentina has a rich intellectual tradition in the Austrian School.

You mentioned dollarization. Could you talk more about this policy?

Dollarization means granting the US dollar legal tender or at least getting rid of exclusive legal tender for a national currency. Panama was born dollarized in 1904, and more recently, Ecuador dollarized in 2000 amid a crisis similar to what Argentina is facing now. El Salvador dollarized in 2001 after facing a similar crisis the previous decade.

When you dollarize, you end up with inflation levels akin to those of the United States. That might seem high from a US perspective after the last few years, but when you have 140 percent inflation in Argentina, 7 or 8 percent isn’t so bad. And even with all the problems with the US Federal Reserve, when you compare that to other countries, the dollar is a good option. By taking away the power of local politicians to interfere in the monetary sphere, you get rid of a huge problem. Now, that doesn’t solve all other problems. The governments can still run deficits and have debt problems. But when you have dollarization, those debt problems don’t really affect the private sector and regular citizens. Whereas with a national currency, a debt crisis usually leads to the deterioration of the currency and a loss in purchasing power.

Maintaining that purchasing power is why nobody is thinking about dedollarizing in these countries. Even in Ecuador, when the left-wing strongman Rafael Correa was at the peak of his power and popularity, with 60 percent or above in approval ratings, the dollar was always more popular than he was. That’s also why we think it’s important for Milei to dollarize and dollarize quickly. If the Peronists come back to power, they could overturn a lot of his deregulatory measures, but dollarization would be very difficult for any future government to reverse.

How hopeful are you that he’ll be able to implement dollarization?

Milei had to join forces with former President Mauricio Macri’s party to win the election, and many people in that party do not favor dollarization. Luis Caputo, the person that Milei put in charge of the finance ministry, who was also one of Macri’s finance ministers, has previously spoken out against dollarization. More recently, he has taken the view that the fiscal issue is more important and that dollarization will be a consequence of stabilizing the economy.

Caputo’s plan involves liquefying the debt through inflation. But the thing with liquefying the government debt is that you’re also liquefying everyone’s savings and salary. So, it’s a bold and even dangerous alternative. I also think that dollarization involves a similar process because once the market realizes you’re serious about dollarizing, the obvious thing would be for inflation to begin to fall and for interest rates to come down, but without destroying purchasing power even more. And I think that would be the better scenario.

It’s not clear if this decision was made out of political necessity or if Milei actually believes in what Caputo is doing. Dollarization is a niche policy that only three small countries have accomplished. Even though it’s been terribly successful, especially in bringing down inflation, relatively few economists understand dollarization and how to bring it about.

What other policies has Milei proposed?

His decree and omnibus law aim to deregulate broad swaths of the Argentine economy. One example is they got rid of price controls for rents that dated back to the 1970s. Another one is the Open Skies policy, which allows airlines from abroad to enter the market and even control flights within the country. Previously, they had a scheme to undercut the low-cost airlines in favor of the national airline, which is heavily subsidized. Milei even said he is privatizing the national airline by handing it over to the workers and cutting subsidies. But there’s a wide scope of reforms. These are just some highlights.

Let’s talk about Latin America as a whole. What are some of the biggest obstacles to the region becoming more prosperous?

One that is not well known is the lack of trade within the region. There is a mostly common language and very similar institutions and historical backgrounds, so you would think Latin America is an ideal region for trade. But trading between countries is very difficult. It’s also very difficult to migrate from one Latin American country to another. For instance, Colombia, where I’m from, restricts how many foreigners companies can hire. And this is standard across the region.

Another major problem is that there hasn’t been a very strong classical liberal element in Latin American politics. In the Anglosphere, you had Thatcherism and Reaganism and these types of movements, but the Latin American right has traditionally been very protectionist and corporatist. A right-wing government in Latin America, especially after the era of military dictatorships, might not bring about a humanitarian collapse like in Venezuela, but at the same time, these governments don’t allow their economies to grow. And, of course, if you don’t grow, you won’t be able to lift people out of poverty. That’s the big problem in Latin America: anemic economic growth. And it’s a question of how conscious people are that you need freedom to have that economic growth.

So that’s also why Milei is interesting. He is, of course, breaking from the leftist model but also from the crony capitalist, protectionist, and interventionist right.

We usually try to end on a positive note. What are you the most optimistic about concerning the region’s future?

I’m not going to be terribly original here, but five years ago, if someone had told me that, in a few years, there would be an openly libertarian or anarcho-capitalist president of Argentina, I wouldn’t have believed them. And this is where we are. And I think the lesson is that sometimes it might seem very difficult to enact freedom-oriented reforms, but it can be done. It is being done now. And it’s being done by someone who was very radical in his approach. He wasn’t moderating his principles to convince centrists. He was straightforward. And I think that’s a very positive example to follow.

The Human Progress Podcast | Ep. 46

Daniel Raisbeck: Javier Milei and the Future of Latin America

Daniel Raisbeck, a policy analyst on Latin America at the Cato Institute’s Center for Global Liberty and Prosperity, joins Chelsea Follett to discuss the recent election of Javier Milei and what it means for the future of Argentina and the rest of Latin America.

Blog Post | Happiness & Satisfaction

Mueller: Two Modest Predictions from 1997

In 1997, John Mueller predicted that the world would soon experience massive gains in economic growth and well-being, but that the general public would be unimpressed.

This article was excerpted from “The Rise of the Politically Incorrect One-Handed Economist,” a presentation at a festschrift in honor of Richard Rosecrance, January 1997.

I have yet to run into an American over the age of 47 who regularly observes, “You know, if I had been born in the 19th century, I’d very probably be dead by now.” Nobody really thinks in such terms, yet the statement is completely true–and, of course, I don’t mean in the sense that just about everybody who happened to be born in the last century is no longer with us, but that life expectancy in the United States as late as 1900 was 47.

It is commonly observed that people don’t appreciate their health until they get sick, their freedom until they lose it, their wealth until it is threatened, their teeth until they ache. In other words, when beneficial things come to us we quickly come to take them for granted.

If they make us happier, we may very well not notice after a brief period of often-wary assimilation: They become ingested and seem part of our due, our place in life. Occasionally, people in affluent societies might pause to wonder how they ever got along without faxes, e-mail, ATMs, word processing, EKGs, jet transportation, frozen pizza, VCRs, garbage disposals, flush toilets, electric can openers, cellular phones, or espresso machines, but on those rare occasions, the observation is generally something of a joke, and rarely do they seriously concede that these eagerly accepted additions to their lives might somehow have made them happier.

Indeed, if anything, there is a tendency to look back at the past myopically, forgetting its complexities, and horrors, and often giving it a golden glow. We like to view the past as a simpler time, though the plays of Shakespeare and Aeschylus certainly do tend to suggest that people in olden times really did have some pretty complicated problems. And nostalgic images of 1900 American life rarely remember rotten teeth or note that each day at least three billion flies were created in cities by horse manure.

A systematic, if quiet, process of standard-raising also contributes. For example, a caption poised above an old carpet sweeper on display in an exhibit in the Strong Museum in Rochester observes, “Labor-saving devices like carpet sweepers helped middle-class people satisfy their desire for cleanliness within the home.” Lest one conclude that this was an improvement, however, the caption writer quickly adds, “Unfortunately, each new development raised standards and expectations for cleanliness, making the ideal as hard as ever to achieve.”

The media may play something of a role in all this, one that leads to a notable paradox. In a place where things are going unrelievedly badly (Sudan, for example), there may be editorial paydirt in optimism. But in places where things are going remarkably well (the United States, for example), good news, precisely because it is so common, simply doesn’t sell. Consequently, pessimists and doomsayers (nattering nabobs of negativism) tend to dominate. The Atlantic, for example, seems addicted to articles like “The Crisis of Public Order,” “The Drift Toward Disaster,” “The Coming Anarchy,” and “The Coming Plague,” and the editors will only be truly happy, some suggest, when they will proudly be able to feature an article entitled, “World Ends, Experts Say.”

The political process is also essentially devoted to bringing out the bad news. Incumbents may like to stress the positive, but challengers can’t –they must work very hard to ferret out things that are wrong and that, at the same time, concern a fair number of voters. If they are successful in this, it would be impolitic for the incumbents simply to dismiss the voters’ concern. They must agree, or appear to agree, that the problem is genuine and then propose a solution to the problem that seems superior to the one proposed by the challenger. The process leads to nice anomalies: The cleanliness of the air in the United States has improved markedly over the last two decades, but most people think (and many people seem to want to think) that the opposite is true.

Therefore, the catastrophe quota always remains comfortably full. When a major problem is resolved or eliminated or when a major improvement is made, there is little reflective comment, and problems previously considered small are quickly elevated in perceived importance. Nowhere is this clearer than in international affairs, where the Cold War and the threat of nuclear holocaust have evaporated in recent years to the distinct inconvenience of doomsayers everywhere. But with scarcely a pause for breath they have adroitly come up with a list of new problems to plague us in our “new world disorder.”

One enumerator lists “the proliferation of weapons of mass destruction and the ballistic missiles to carry them; ethnic and national hatreds that can metastasize across large portions of the globe; the international narcotics trade; terrorism; the dangers inherent in the West’s dependence on Mideast oil; new economic and environmental challenges.” That none of these problems is new and that some of them are actually of less urgent concern than they were during the Cold War is of little concern. Wars deriving from ethnic and national hatreds are neither new nor increasing in frequency in the world, and nuclear proliferation is no more a new problem–in fact, may well be less of a problem–than it was in 1960, when John Kennedy repeatedly pointed out with alarm that there might be 10, 15, or 20 nations with a nuclear capacity by 1964. And the international drug trade has obviously been around for quite some time, while the West’s supposedly dangerous dependence on Mideast oil has been a matter of pointed concern at least since 1973. The impact of terrorism has often been more in the exaggerated hysteria it generates than in its actual physical effects–fewer Americans are killed by international terrorists than are killed by lightning or by deer. Economic and environmental challenges are hardly new either, but new alarms can be raised. In a pessimistic best-seller in 1993, historian Paul Kennedy was able to work up quite a bit of concern over pollution, immigration, and robotics. Interestingly enough, war, a central preoccupation of his pessimistic best-seller of 1987, had apparently vanished from his worries: the word “war” does not even appear in the index of the later book.

Or, like Zbigniew Brzezinski, one can focus on such endearing, if vaporous, problems as “turmoil.” And if that isn’t alarming enough, we can always moan about the deficit, a problem chiefly caused by the fact that people live too long. Happily, in the course of the century improved medical care has not only generated a wonderful new problem to complain about, but it has supplied the average American with nearly 30 additional years of lifetime in which to do so (and with his or her original teeth, to boot).

All this suggests, then, two modest predictions about the next century:

The world is likely to experience a massive increase in economic growth and well-being.

And nobody will be particularly impressed.