Why Some Economies Grow Faster Than Others

Why Some Economies Grow Faster Than Others A Comparison of Cuba and Israel Harry M. Geedey Professor Evelyn Bolden Economics 250 March 1, 2011 Abstract The governments of Cuba and Israel are relatively young. The two countries are of similar size, population, and possess similar natural resources. They each have port cities with easy access to the world. Their governments were founded on socialist principles. Despite the similarities, the economic performance of Israel has far outpaced Cuba’s.

This paper will examine the reasons behind the disparate economic performance of countries, and then specifically examine the economies of Israel and Cuba. Why Some Economies Grow Faster Than Others There are many reasons why some economies grow faster than others. Let’s begin with the things that aren’t in the control of individuals or governments. Geography plays an important role in economic growth. It is more difficult to ship and receive goods in landlocked countries. Extremely hot or extremely cold climates limit the amount of human exertion possible and require more inputs in the form of heating and air conditioning.

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Economies that have an abundance of water, valuable minerals, arable land, and oil also have a significant advantage over those that lack natural resources. Ceteris paribus, most economists would agree that the next most important element of economic growth is a market oriented economy. The things that are necessary to facilitate a smooth transition to a market economy follow. People must have the freedom to seek utility and produce goods and services. Individuals must also have the right to own property, and the opportunity to succeed or fail.

Economic growth will be diminished if individuals do not have the right to own property and the opportunity to succeed. Individuals must also be educated to the extent that they can assess the utility of various goods and services and choose the ones that best satisfy their needs. Individuals must also be educated to the extent that they are able to compute “the utility generated from alternative forms of self employment for their own account” Rosefield. Actions that replace, inhibit, or restrict these activities in any way will result in market failure.

Implementing a market economy without rules will result in excessive rent seeking, activities in restraint of trade, restricted alternatives, and excessive inequality. Government must ensure there are rules (laws) to make sure competition is healthy. This should include laws to prohibit: practices in restraint of trade, price fixing, false advertising, barriers to entry, and others. To insure some level of equity, governments should also put measures in place to capture and redistribute wealth. This should include progressive income and inheritance taxes and various social welfare programs.

Using taxes to build infrastructure and education programs will accomplish income redistribution and position the economy for further growth. Determining the extent to which equity should be pursued is a balancing act. If governments pursue equity too fervently, individual investment and effort will be stymied. If equality is not pursued, the resulting inequality will result in class strife and market failure. The ability to raise money and finance new businesses is critical to economic growth.

Investors will not invest in economies that lack a stable currency or where governments are likely to confiscate the capital that was purchased through investment. Governments can play an important role in helping businesses raise capital by establishing contract laws, maintaining a stable currency, and promoting foreign investment. To avoid inflation, fiscal policy should be established with the express intention of not over stimulating the economy. Governments may also create central banks to implement a monetary policy designed to maintain a stable currency and to regulate the economy.

In order to compete on the world stage, economies require both productivity and quality. Technology is, therefore, a vital component of a growing economy. Technology can allow the productivity of underdeveloped countries to catch up to more developed countries. Economies can acquire the latest technology by either purchasing it, or by promoting joint ventures with technologically advanced foreign companies, as the Chinese have done. Governments may also promote the creation of new technologies and the private acquisition of existing technologies by issuing grants and loans, nd by enacting favorable tax policies. Classically trained economists believe, “free enterprise with minimal state participation is superior to all past, present, and future rivals” Rosefield (2002, Introduction). Other economists are of the belief that a mix of socialism and free enterprise will yield superior results. Some economists ascertain that openness to trade is the key to economic performance. Economic growth is also affected by the culture. Cultures that subvert individual utility seeking with communalism, will not reach their full growth potential.

A society that accepts corruption as a way of life will suffer market failure and will never reach its potential growth. A culture that places an extremely high value on leisure will not reach its full growth potential. Rosefield (2002) makes it clear that “temperaments, culture, mentality, criminal proclivities, institutions, and the rules shaping economic actions” affect utility seeking and therefore, economic performance. Why some economies grow faster than others is a complex question with many variables and no simple easy answer.

Economists are not unanimous about what should be measured to determine economic growth. This does not mean we can’t learn from current economic examples. I hope to demonstrate some of these issues through a comparison of Israel and Cuba. Cuba and Israel Similarities The Israeli and Cuban governments are relatively young. The state of Israel was founded in 1948 after the United Nations divided Palestine into Jewish and Arab states. The current government in Cuba came to power in 1959 after the revolutionary forces of Fidel Castro overthrew the corrupt regime of Battista.

Both countries are small. Israel is about the size of New Jersey. Cuba is approximately the size of Pennsylvania. Both economies have access to sea lanes. The major ports in Israel are Ashdod and Haifa. Cuba has numerous small ports. The largest and most modern Cuban ports are Havana and Santiago de Cuba. Israel and Cuba have comparatively small populations of 7. 6 million and 11. 2 million respectively (World Factbook, 2010). Israel is in a temperate climate but it has several large desert areas where it is very hot and dry. Cuba is tropical but the climate is moderated by trade winds.

Both countries place a high value on education. Cuba has a literacy rate of 99. 8% while Israel’s literacy rate is 96. 9% (World Factbook, 2010). Cuba has nickel, cobalt, iron ore, copper, manganese, salt, timber, oil, and natural gas as natural resources (World Factbook, 2010). Israel is remarkably similar with copper, phosphate, bromide, potash, clay, sand, bitumen, and manganese as natural resources (World Factbook, 2010). Cuban agricultural products include sugar, citrus, tropical fruits, tobacco, coffee, rice, beans, meat, and vegetables (World Factbook, 2009).

Israeli agricultural products include citrus, tropical fruit, vegetables, dairy, meat, and poultry products (World Factbook, 2010). Both countries rely on imports and tourism and both were founded as socialist states. “Israel was conceived in the minds of its original founders and supporters as a socialist state. The very idea of private property was anathema to the founders of Israel” (Raimondo. 2002, p. 2). The Israeli government originally owned most of the means of production. The kibbutz, where everything was held in common, was an early manifestation of Israeli socialism.

Cuba under Castro remains a totalitarian communist state where the government owns the means of production and strictly controls economic life. Cuba and Israel Differences “Cuba is a totalitarian communist state headed by General Raul Castro and a cadre of party loyalists…The Cuban government controls all aspects of Cuban life through the Communist Party and its affiliated mass organizations, the government bureaucracy, and the state security department” (World Factbook, 2010). Courts are subordinated to the National Assembly and the Council of State.

According to the World Factbook, 2010 “Due process is routinely denied to Cuban citizens, particularly in cases involving political offenses…The constitution states that all legally recognized civil liberties can be denied to anyone who opposes the ‘decision of the Cuban people to build socialism”. In contrast to Cuba, Israel is a parliamentary democracy. Government is headed by a prime minister who “exercises executive power and has in the past been selected by the president as the party leader most able to form a government” (World Factbook, 2010).

Israel’s legislative branch is the Knesset. The Knesset elects the president for a 5-year term. Israel has an independent judicial system that includes both secular and religious courts that adhere to the rule of law, ensure civil liberties, and recognize property rights. From the mid seventies to the mid eighties Israel experienced a decade of poor economic performance. Consequently, Israel began making economic reforms during the late eighties, and continuing through today, that include privatizing government held assets both large and small.

Privatized assets thus far have included banks, communications, the El Al Airline, Zim Navigation, and much of the chemical industry. (Isreal Ministry of Foreign Affairs, 2010). Israel has also implemented reform programs that limit the national budget and minimize government intervention in private business matters. Cuba is considering serious economic reforms that would emulate those taken in China but has done little to this date. “Most of the means of production are owned by the government and, according to Cuban Government statistics about 83% of the workforce is employed by the state” (World Factbook, 2010).

The exchange rate for the peso and the convertible peso are fixed and controlled by the state. Unlike Cuba, the exchange rate of the Israeli Shekel is determined by demand in the international money market. While Cuba has been under an economic embargo with the United States since 1960, Israel’s relationship with the United States has blossomed. Israel’s trade with the U. S. was estimated at $22. 3 billion in 2009. Israel’s total exports were estimated to be $50 billion. By comparison, Cuba’s trade with the U. S. was virtually non-existent and its total exports were only $3. 8 billion (World Factbook, 2010). Cuba lost approximately $5 billion in annual aid after the Soviet Union collapsed in the early 90’s (World Desk Reference, 2011). In contrast, Israel continues to be heavily supported by the U. S. and received $2. 38 billion in grants, credits, and military aid from the U. S. in 2008 (U. S. Census Bureau, 2011). Performance Data Gross Domestic Product in Billions of Dollars 2009 est. (Worldfactbook) Per Capita Gross Domestic Product 2009 est. (Worldfactbook) Unemployment Rate-2009 (Indexmundi) Growth Rate % (Indexmundi) Results

While Cuba remains a Third World country mired in the old order authoritarian communist model, Israel has transformed itself from a small socialist country into a First World economy. Israel’s GDP is roughly four times that of Cuba. Israel’s Per Capita GDP is almost six times Cuba’s. Israel’s exports were estimated to be $50 billion in 2009, about 13 times that of Cuba’s $3. 7 billion (World Factbook, 2010). Cuba’s unemployment rate and growth rates appear to be better than Israel’s but one must remember that statistics from closed authoritarian systems are suspect.

When looking at the unemployment rate one must also consider that 83% of the work force in Cuba is employed by the state. The work force in a capitalist society is able to maximize utility by seeking work that fits their skill set and meets their needs. They also have the freedom to succeed or fail. Unemployment rates in capitalist societies will therefore tend to be higher than in communist countries. Causes All First World countries, including Israel, have certain characteristics. They “possess workably competitive market systems with predominantly private ownership of the means of production.

They broadly uphold the golden rule, and adhere to the rule of law” (Rosefielde 2002, p. 211). The reasons for Cuba’s failure are: it has not embraced a competitive market system, except in very limited circumstances does not permit the private ownership of the means of production, does not uphold the golden rule, and does not adhere to the rule of law. Israel began the transformation to a market economy during the eighties and continues to privatize the means of production. The change to a market economy has paid off handsomely for Israel.

Israel developed and acquired the latest technology in diverse areas such as; aviation, communications, computer-aided design, fiber optics and medical electronics. Attesting to her high tech success is the fact that “Israel has approximately the same number of companies listed on the NASDAQ as the next three countries combined”… In addition, “45% of Israel’s exports are high tech” (World Factbook, 2010). Cuba expropriated U. S. property soon after Castro came to power. The U. S. promptly placed an embargo on trade with Cuba. Companies and individuals are reluctant to invest in countries where their assets may be ceased.

The result of taking private property is that it is much more difficult to raise capital. While Cuba has been isolated from the world’s largest economy, companies in Israel have had no problem raising capital. In fact, Israel has become the United States largest trading partner. The communist culture in Cuba places a high value on equity. Economics is all about choices. The leaders of Cuba chose to pursue to equity. Unfortunately pursuing equity to the exclusion of private property and individual rights, as demonstrated in Russia and China, is a prescription for failure.

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