At the 1927 Nuremberg Rally, Adolf Hitler stated: “We are socialists, we are enemies of the capitalistic economic system for the exploitation of the economically weak, with its unfair salaries, with its unseemly evaluation of human being according to wealth and property instead of responsibility and performance and we are all determined to destroy this system under all conditions”. This statement summarizes the nature of the relationship between socialism and capitalism. Apparently, the war between the two systems is a must. Socialists defend their point of view by accusing and pointing fingers towards capitalists. Their decision is made: revolute to crash the evil and greedy capital accumulators by property abolishment. The reason is the exploitation of workers under capitalism whereby it is believed that capital is accumulated and economies are prospering at the expense of the people. But no revolution can be made in white gloves, human lives need to be sacrificed to reach the ultimate goal: achieve post-scarcity whereby everyone owns everything and enjoys high standards of living. Unfortunately, the end didn’t justify the means, 94 million lives were wasted for void written purposes that were never reached and people struggled to survive and reassemble their farfetched lives. After witnessing these terrific results, strategies were reset. Originally capitalist countries deepened their commitment to capitalism while few applied protectionist measures. Some socialist countries like Brazil ruled socialism out of their calculations especially after the collapse of the Soviet Union in 1991 while some other socialist countries like Cuba established further bonds with their beloved, barbarian system. In this paper, a comparative study will be conducted to evaluate and assess the behavior of the manufacturing industries in Brazil and Cuba over the last 24 years referred to as post-USSR trying to identify the system that will sustain economic growth.
Brazil is believed to be a fast-growing developing economy with huge potential. Nowadays, its economy outweighs that of all other South American countries being characterized by a large and well developed manufacturing, services, agricultural and mining industries. It has established itself as a strong competitor in world markets and it is already knocking on the doors of the developed world. It thoroughly worked on maintaining macroeconomic stability to attract more investments that would strengthen her position further. Also, it showed a high interest in increasing labor productivity by investing in education and imposing technology requirements on firms to stay updated. But, Brazil didn’t acquire this good economic status overnight nor secured it from a wish granting factory, it showed high levels of dedication and public awareness. Yes, citizens are more like citizens today. They started to understand and acknowledge their integral role in setting their own resolution for the country. Today, they are questioning the political performance, one example is the recent conviction of 25 politicians and officials by the Supreme Court for receiving a bribe to elect a president. In other words, political freedom has emerged following the economic freedom embraced by Brazil. So, Brazilian citizens freed themselves from the negative perception of liberalism and started to refuse and stand against following government’s rules and restrictions blindly. As Milton Friedman said to be economically free is to build industrialized economies and an educated society which naturally leads to political and economic freedom.
To understand how this cycle applies to Brazil, it is important to have an insight on the studied country. Throughout history, Brazil was far from being classified as a capitalist country, it was colonized by Portugal from 16th to 19th century, witnessed a dictatorship and a military rule in the 20th century where communists dominated on the country politically and economically. They succeeded in gaining the Brazilians affiliation using emotional speeches about the right to be treated and getting paid equally. This corrupted the minds of people who showed their willingness to enhance such a system after the huge increase in industrial production didn’t render a better quality of life. Under the Marx inspired economy few people owned lands, government was in control and allocated all the capital. Trade activity was limited since the country aimed to be self-sufficient. The main focus was on agricultural products which included coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus and beef. This evidence sheds doubt on the credibility of socialism that promised a good economic status and an increased utility to the society as a whole only to find later that Brazilian citizens were stuck in a status quo. They kept on being the naïve farmers with limited knowledge and power and subjected to a feudal system in its essence but named socialism. Regardless of people well-being, the economy of Brazil in the 20th century was in good shape just like any other economy under the Soviet Union reign. But the question is: at what expense? Socialists didn’t believe that happiness and high GDP can meet, thus, a compromise was needed and economic growth was achieved by exploiting people, erasing their preferences and imposing stuff on them. The system seemed to work perfectly for Brazil until the 1983-1991 period. It was connoted as a “very high inflation period” whereby GDP dropped significantly and a negative growth rate was witnessed, the economy was suffering during this period, a debt and financial crisis was peaking along with poor productivity and primitive products based on agriculture.
The end of this period was coupled with the dissolution of the Soviet Union for political reasons. Mikhail Gorbachev, the last Soviet statesman, decided to untie the Soviet burden on Eastern Europe countries like Bulgaria, Romania, Poland, Czechoslovakia and East Germany. Berlin wall collapsed reuniting Western with East Germany, and then independence movements followed. So, a process of democratization took place under an American supervision. The United States continued to be the Elephant in the room supervising all the policies and procedures until USSR was distorted. This historical event implied worldwide changes affecting economies. Brazil was no exception where democracy emerged and people got voting rights. The economy started to embrace capitalism. Many observers describe Brazil as the country who saved itself from the socialism plague. It acknowledged the important role that capital accumulation plays in an economy and worked on increasing the incentives to invest and accumulate further capital. Moreover, Brazil considered technology and the role it plays in economic progress. It is measured according to three main metrics – research and development effort, scientific and research talent, and the level of innovation to end up with the Global innovation index whereby Brazil is ranked 43rd among 143 countries as per 2013 report. It is relatively a good standing and a proof that the Latin American country has evolved. The main reason behind technological advancement is Brazil’s post-USSR strategy that consisted in shifting away from agricultural production paying small returns to mass productions generating huge returns. It concentrated on manufacturing industries to maximize its profits. It also gave close attention to services sector to leave the economy highly dependent on manufacturing and services sectors adding up to 87.1% of GDP which equals $ 2.347 trillion. Moreover, Brazil enjoys a high purchasing power parity (PPP) being ranked 8th in the world compared to the 77th position of Cuba. It also succeeded in lowering unemployment rates to reach 4.8%. The graph below published by Reuters, shows the GDP fluctuations during the first decade of the 21st century:
As it is shown, GDP increased significantly in the last decade which proves the efficiency of the embraced system. To reach these advanced positions, Brazil implemented a very crucial strategy in the manufacturing industries which will be given close attention in the following part.
The up rise of these industries during the capitalist era was coupled with a more developed division of labor and a larger extent to market which highlights a conformity with Adam Smith theories. However, one must keep in mind that Brazil always had natural resources and a large workforce constituting basic keys of success but it is only when put in the right political and economic framework based on democratic rather than monopolistic institutions that they rendered an enormous surplus. Technological advancement was aimed whereby Brazil implemented intensive research especially in renewable energy sources. It succeeded in becoming a clean energy country with hydroelectric power and alcohol playing a major role in the energy mix. So, currently it is on its way to substitute petroleum-based sources with clean energy sources and it is expected to prosper in this field given its intensive work on improving infrastructure. The success trajectory naturally implies the need of specialized knowledgeable people in the subject matter. This resulted in an increased productivity and efforts to explore further applications in order to make these new sources feasible. The research has deepened to a point where professionals started to claim the possibility of generating energy from lightning! Other industries flourished as well such as textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, and given the technological advancement and specialization, these industries enjoyed high productivity and efficiency. This fact helped Brazil to impose itself on the international market as a solid competitor. The pie chart below shows the products exported by Brazil:
Furthermore, one must consider the growing industry of information technology in Brazil. The innovative and sophisticated business sector of the country deserves the credit for the 56th world rank of Brazil in the Global IT report of 2011. The market environment, the quality of ICT deployment framework, and the private sector development in general are the major contributors.
Unfortunately, drawbacks are present. Brazil’s Amazon rainforest is undergoing a massive destruction due to the increasing importance given to industrial growth and technology. This traces us back to the theory studied in population growth whereby the fear isn’t about the lack of resources anymore, but rather about their abundance which constitutes a threat on the environment if they were to be used exhaustibly to increase economic growth.
It is true that Brazilian economy currently suffers from a recession, but it is unfair to measure the feasibility of a system based on a short-term event. The recession might cause a temporary slowdown in the economy but it surely won’t abstain Brazil from reaching the developed world standards. However, the present Brazilian economic status is still better than Cuba’s economy.
The Republic of Cuba is the home of the notorious Castro family who is ruling the country since the 1960’s. After overthrowing President Fulgencio Batista, Fidel Castro adopted a Marxist-Leninist model of development, and converted Cuba into a one-party socialist state under Communist Party Rule. Central economic planning took place whereby industry and business became nationalized and government controlled everything. Cuba had deep and strong relations with the Soviet Union having adopted all its beliefs and views. The latter used to back, and subsidize Cuba whenever it felt the need to do so. Just like Brazil, this resulted in a good Cuban economy that sacrificed the well-being of its people. The crash of the Soviet Union didn’t put an end to Castro’s legacy who continued to shape anti-globalization ideas and quoted the post-USSR stage as the “Special Period” of Cuba. Believe it or not, Castro has won several international awards and he is the role model of many young people who look up to him as the person who liberalized Cuba from imperialism and shaped humanitarianism. This profile is questionable especially when looking at the results of his rule: dictatorship, human rights abuses, capital destruction and migration of more than one million Cubans. What’s even more astonishing is to hear a man who ruled his country for almost 50 years and retired aged 85 saying: “I think that a man should not live beyond the age when he begins to deteriorate, when the flame that lighted the brightest moment of his life has weakened. I believe that all of us ought to retire relatively young.”
All this allows us to draw a fair guess of the efficiency of socialism in Cuba, especially on capital accumulation and industries. The Cuban special period witnessed a great de-industrialization for numerous reasons. Subsidization from the Soviet Union ended causing an incapacity in the manufacturing sector, not to mention the transfer of uncompetitive technologies that left Cuba behind the world standards of production. Also, the over-valued Cuban exchange rate pushed traders away. Most importantly, capital destruction occurred. Re-investment and maintenance were viewed as minor issues during the Soviet era causing capital to collapse thereafter. Moreover, Cuba continues to suffer from low investment levels. Investments consisted of 10.5% of GDP in 2008, a relatively low percentage compared to Brazil’s 20.6% fraction. One factor that deepened the investment scars in Cuba was the prohibition of small and medium enterprises which decreased the incentives of entering the manufacturing industries and blocked entrepreneurial trial and error. All these facts lead to an inability to compete and to a production reduction in the 50 to 99% range in many sectors excluding the pharmaceutical industries with a 76.5% appreciation in production.
The consequences following the de-industrialization process were very detrimental on the Cuban economy. Unemployment increased sharply coupled with a diminished volume of output that equaled only 44.9% of the 1989 level. So, one can infer that a loss of the foundation on which diversified manufacturing activities could be developed in future was encountered. In other words, Cuba lost the collection of economic activities that once surrounded the production process from the acquisition of inputs all the way to the processing of outputs and final goods. In this context, the sugar industry suffered greatly. Parts of the sugar related manufacturing sector went bankrupt, notably the manufacture of cane harvesters and agricultural machinery and equipment as well as the production of replacement parts for the sugar mills. Below is a graph showing the decline in industrial output during the post-USSR period. It is compliant with the de-industrialization process explained earlier.
After this recession, Cuba acknowledged that it can no longer apply the purely introvert and socialist economic system so it started to untie few protectionist measures. It aimed to balance between the need for loosening its socialist system and the desire for firm political control. The results was a set of 25 guidelines, the “Lineamientos de la Política Económica y Social del Partido y la Revolución” on the manufacturing sector approved by the communist party in 2011. These guidelines included prioritizing exports (meaning more openness to trade: Cuba started to trade with Venezuela by exchanging pharmaceutical and medical products for barrels of oil) and maintenance, assuring a sustainable flow of inputs to pick up production and employment, emphasizing training and updating the employees with the latest technologies to increase productivity, and most importantly reconstructing industries and re-accumulation of capital, especially in pharmaceutical and construction materials. However, writing and approving these guidelines was the easy part, implementation is the crucial task. The main obstacle faced by Cuban economy was the absence of prices under the communist system. It is the reason behind the destruction of capital and it continued to be the reason behind the inefficiencies of this saving re-industrialization plan. Without access to knowledge and information the plan became obsolete since no productive allocation could be made nor a feasible calculation for the uses of capital in order to optimize. In fact, Ludwig Von Mises, an Austrian School economist, was able to predict these consequences in 1920 in the early period of the emergence of communist parties. Moreover, Cuban statesmen spent big amount of time trying to plan for a re-acquisition of the collapsed capital not realizing that a prospering economy doesn’t follow a given set of rules but rather enjoys playing freely with the market mechanisms. In addition, the intentions for a real change are to be questioned for many reasons. Even though it allowed property ownership, on homes basically, consumption remained depressed due to the low government income whereby the take home salary is very low compared with the GDP per capita. This leads us to question the destiny of the difference between GDP per capita and take home income hinting the presence of high levels of corruption and theft. Also, the authorities have only legalized 201 categories for activities of self-employment (capital ownership).
Many observers believe that the Communist control of Cuba has abstained it from advancing and enhancing new technologies. While South American countries like Brazil has evolved, Cuba continued to be an island stuck in the past and devolved instead, the realm of cyberspace constituting a major factor. People struggle to connect with one another and with the rest of the world given the poor infrastructure and the limited internet access. Cellphones and PC’s are yet to be put at Cuban people’s use and telecommunication giants were forbidden from entering the market for years and are now allowed to supply their products in a limited manner: only 11% of the Cuban population owns cellphones. Web access remain both very expensive and rare whereby less than 5 percent of the 11 million Cubans are able to get online. Observers claim that the 21st century world of online connectivity caravan has already passed away leaving Cubans unsure if they will ever get the chance to catch up.
To sum up, this paper has scrutinized the manufacturing industries in two countries, Cuba and Brazil, in the post-USSR stage. Having acknowledge the economic background of each country, the Capitalist Brazil and the Communist Cuba, a conclusion was reached. As for Brazil, it is on the right track to reach sustainable growth after assuming the non-rivalry of technology but it still has to cope with efficiency problems. In this context, one must consider the developing status of Brazil which implies the occurrence of few fallacies and mistakes that lead to recessions. The country must then prove its ability to overcome these obstacles. Regarding Cuba, the coercion approach adopted by the communist party has diminished the capital and left the manufacturing sector bleeding which deteriorated the foundation on which a revival is based. Cuba has become a land of tarnishing outdated cars and crumbling architecture due to the lack of innovations that provide new options, and a place for intense shortages and widespread economic dysfunction. It is true that it has few promising sectors but it is the institutions mismanagement that is preventing it from advancing. However, the choice between capitalism and socialism is the easiest part. One can look at socialism as a person owning 2 cows and the government deprives him from both of them to equally allocate the amount of milk produced on the society. Whereas under capitalism, a person owning 2 cows sells one of them, buys a Taurus and forms its own farm. Given that he bears the risk of losing, he deserves the profits rendered by the farm. It is not hard for a rational personal to choose capitalism without hesitation but what really matters is how the institutions lying under the system are run. One must understand that utility is subjective and shift away from the utilitarian approach where the society’s well-being is considered and prioritized over individual freedom.
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