How the Cubans Plan to Create Economic Growth

Many years ago, the Chinese government realized that communism had failed economically.  They had to grow their economy because the peasants were revolting, so they declared that it was OK for entrepreneurs to found businesses and make themselves rich.

The Chinese didn't offer tax credits or incentives.  They didn't clean up their famously corrupt judiciary or try to root out crooked party members.  They merely got out of the way by declaring that generating personal wealth, which high-level government officials knew was utterly impossible without hiring a lot of employees, was no longer a capital offense.

The resulting economic boom has been called the Chinese Miracle.  The Chinese recently overtook the Japanese to become the #2 economy in the world.  The increased taxes paid by the newly wealthy Chinese middle class made it possible for the government to afford the Beijing Olympics, a blue-water navy, research into extracting deep water ocean resources, a high-speed rail and highway network, and a space program among many other useful things.  Not bad for merely getting out of the way!

It wasn't quite that simple, however.

In a sense, the Chinese experiment with unleashed capitalism shouldn't be called a job creation program because, technically speaking, every Chinese adult had a job at the time and all graduates were guaranteed jobs.  All the farmers worked for state-owned farms, all city dwellers had jobs working for one of the State-Owned Enterprises (SOEs).  As with government-run enterprises everywhere, the SOEs were famously overmanned and ridiculously inefficient, but the unemployment rate was 0%.

Whom Can You Hire?

It wouldn't have done much good just to tell entrepreneurs that they could go ahead and get rich because nobody can get rich alone.  Getting rich absolutely requires hiring employees to help you get rich.

Even media folk such as Oprah Winfrey, Madonna, and Rush Limbaugh who make their personal selves into products don't do it alone - they hire hordes of staffers to help them make themselves rich.  As long as Oprah or Rush can figure out how an additional employee can bring in more revenue than he or she costs, they'll keep hiring.  But what if nobody will work for you because everybody already has a job?

Suppose you're a middle manager at one of the Chinese SOEs.  You know you aren't going to advance, but you'll never be fired and you don't have to work all that hard if at all.  You have company housing, company medical care such as it is but you don't know any better, and you'll have a pension when you retire at the statutory age.

Along comes your idiot brother-in-law who's got some crazy idea about getting rich by putting together Happy Meal toys, selling cheap alarm clocks to Wal-Mart, or some such goofball notion.

Imagine your reaction when he shows you one of his sample Happy Meal toys.  "You're gonna get rich selling those?  Not even crazy round-eyes will buy those!  Go away!"  You sit there in your safe, secure, SOE job, counting the minutes, hours, and days until retirement just like the vast majority of government employees everywhere.

Squeezing the SOEs

In order to get the Chinese miracle to take off, the government had to encourage vast numbers of employees to take advantage of the entrepreneurial opportunities they were offering.  The key to the miracle wasn't just getting out of the way as essential as that was.  They also had to squeeze the SOEs to create surplus workers hungry enough to either start new businesses or to go to work for new businesses.  So they started squeezing.

One of their first moves was to start charging SOEs interest on the money they borrowed from the government to cover their deficits each year - previously, this had just been free money from heaven.  They made it clear that they'd wind up any SOE whose debt level kept increasing with no plausible way of turning around.  The only way to convince the multitudes that they were serious was to drive some SOEs to the wall, which they did, spectacularly and messily.

The threat of being wound up and turfed out into the mean streets concentrates the mind wonderfully.  All of a sudden, upper level SOE management, who mere months before had sworn that they needed every single one of their overworked employees to function at all, discovered that they didn't.

Getting by with fewer workers meant squeezing more work out of the survivors, of course.  This isn't hard to do when you suddenly discover that the government has given you the power to fire employees and that they'll fire you if you don't cut costs deeply enough.

All of a sudden, as if by magic, there was a vast pool of hungry entrepreneurs and potential employees facing starvation.  Did they starve?  Nope, they went to work and created the Chinese Miracle.

The Birth of the Cuban Miracle

The Cubans, being a bit less inscrutable than the Chinese, are a bit more forthcoming about their economic plans.  Castroism, for all its political success in keeping power concentrated in Castro's hands, is as economically bankrupt as Chinese communism if not worse.

There's enough contact between Cuban residents and their offshore kin that the Cubans know that their country has failed economically.  Although the secret police are still adept at rounding up dissidents, protests are becoming more common and less covert.  Like the Chinese after Tiananmen Square, the government has to do something to keep the peasants from revolting.

What are they going to do?  BBC News reports that they plan to squeeze their inefficient SOEs:

Cuba has announced radical plans to lay off huge numbers of state employees, to help revive the communist country's struggling economy.

The Cuban labour federation said more than a million workers would lose their jobs - half of them by March next year.  [emphasis added]

Those laid off will be encouraged to become self-employed or join new private enterprises, on which some of the current restrictions will be eased.

That's the Chinese recipe for reviving struggling economies in a nutshell -create massive unemployment over a period of time by squeezing government-owned businesses whle offering the newly unemployed opportunities to make money by starting as many businesses as possible.

The BBC pointed out that of the estimated 5.1 million workers in Cuba, 85%, or 4.3 million, are government employees.  Firing one million workers will reduce government employment by close to 25%.  That's about what the Chinese did when they squeezed their SOEs; some of the survivors became profitable enough to sell stock via IPOs.

By comparison, the American federal government, excluding the Post Office and Amtrak, employs about 2 million.  Excluding education and hospitals, state and local governments employ 8.3 million.

Adding up all the government-employed teachers, health care, and postal workers would take too much Googling, so let's simply assess total government employment at 10.3 million workers.  Cutting government employment by 25% would put 2.5 million hungry ex-bureaucrats on the street.

"We have to end forever the notion that Cuba is the only country in the world where you can live without working," he [Raul Castro] said.

Lessons for America

The Cuban and Chinese plan for economic growth starts by creating massive employment and getting out of the way at the same time.  The goal is to lay off government employees about as fast as they're able to start new businesses while making unemployment unpleasant enough for them to want to do that.  The Chinese did it and it worked like a dream; the Cubans are taking baby steps along the same road.  We hope that they arrive at the same destination.

The Obama administration seems to have learned nothing from the Chinese Miracle.  Lo and behold, the inexorable workings of the market place have arranged for the Cubans to repeat the lesson:

• It's not enough to say you want businesses to create jobs, you have to offer incentives.  Whereas the Chinese and Cuban governments said it was OK to get rich, the Obama administration is threatening to tax away all the profits while vilifying businessmen who create enough jobs to earn serious amounts of money for themselves.
• It's not enough for businessmen to want to create jobs, willing employees have to be available at a price that lets employers earn a profit from their labor.  Whereas China and Cuba are squeezing their SOEs and throwing employees out with no social safety net, the Obama administration is growing unproductive government jobs, extending unemployment payments, and raising minimum wages and other employment costs to make it harder to make money by creating jobs.
• There's no incentive quite as effective as real unemployment.  Cuba plans to deliberately create a 10% unemployment rate by March of 2011 and go on from there.

Given the obvious lack of productivity in government organizations all around the world, it's likely that most of these million workers are in fact not doing anything much, but now they won't be paid for doing nothing much.  In trying to survive, they'll have to offer goods and services which their fellow Cubans actually want to buy.

When the Chinese SOEs were squeezed, they naturally got rid of their least useful employees first.  The Chinese Miracle was carried out by government rejects.

It remains to be seen whether the Cuban government will be able to achieve similarly high standards among the employees it lays off.  Assuming that they pull it off, we'll soon be seeing Burger King toys stamped "Made in Cuba."  When was the last time anyone saw a freebie toy stamped "Made in USA"?