The Sovereign Economic Model. A manifesto for rising nations

What is the Sovereign Economic Model?

The Sovereign Economic Model is a variant of capitalism with better checks and balances than current liberal capitalism. It is more sustainable, better balanced, and fairer, and it should provide further benefits for people and the state. It tries to remove the instability caused by unproductive, toxic, and inefficient economic activities. Not only that, it is centered around a development model that favors creation of wealth, employment, and growth over an anarchic hunt for profits. Furthermore, it is not an entirely novel concept, as many countries have practiced or are currently practicing one or more of its tenets. It tries to aggregate all best practices that have contributed to the positive development of many countries in the last century. The author of this book merely attempts to baptize these concepts under the same nominal umbrella. This economic model is based on sovereignty, as a country shall itself contemplate which development path to choose without the hackles of status quo, ingrained liberal economic theories or external pressures.

The Sovereign Economic Model includes the following tenets to achieve the stated purposes:

• State capitalism: to control the most strategic sectors of the economy

• Wealth creation: to create shared wealth for its people and the state

• Industrialization: to drive a country’s progress in technical and technological production, investments, and forward advancement

• Import substitution: to replace most imported goods while driving industrialization in the country

• Diversification: to produce as many goods and variants thereof as possible

• Small and medium enterprises: to allow small businesses to fill as many niche industries as possible and drive large socioeconomic improvements of their specific business type

• Trade/export: to improve trade balances by letting businesses expand into foreign markets

• Taxation: to tax in a way that suits real economic development

• Market regulations: to stifle de facto monopolies and cartels by limiting market share, lowering the cost of entry, and fostering competition

• Education and research and development (R&D): to position the country for technical and technological breakthroughs by aligning the education and research sectors to the needs of the economy in a way that produces highly skilled human resources.

Why is the Sovereign Economic Model needed? Why sovereignty? Sovereignty is needed to let each country decide on the best economic development model for its citizens. This implies severe political consequences, as all anchors holding a country back from sailing along its most beneficial economic route must be cut loose. As big economics is invariably linked to big politics, immense struggles will take place. Why a new or different capitalist economic model is required is another question. The current commonly used economic system of neoliberal capitalism is not working. It is increasingly unstable and does not grow wealth. Nor does it produce good growth in gross domestic product (GDP) numbers. Significant changes in economic policies will require some adaptation by those who are now benefiting from the imbalanced economy by offering economically harmful products and services. The Sovereign Economic Model has many benefits over existing economic systems, such as these:

• Improved economic development model

• Less economic instability

• Increased wealth creation

• Distributed and shared wealth distribution

• Long-term sustainability

The Sovereign Economic Model does not throw the baby out with the bathwater but tries to fine-tune several features of capitalism. Some economic experts fiercely criticize such a «paternalistic» economic model by citing moral and ethical considerations. Their criticism includes the following:

• «Too communist/socialist»

• «Too nationalistic»

• «Too fascist»

• «Too ideological»

• «Too revolutionary»

• «Too paternalistic»

The Sovereign Economic Model does not have ideological components per se. It simply strives to give the fruits of labor to the state and the people and prefers to avoid the unnecessary accumulation of capital. If a considerable accumulation of capital is possible, such as through de facto monopolies or rent-seeking economic activities, then the companies that pursue it should be state-owned corporations (SOE). The excess profits they earn should go to the state itself, which can grant higher-quality services, lower taxes, and a higher standard of living to citizens of the country. Excess profits of a state can be used in a variety of ways, including to provide a better education system, better health care, higher pensions, or other subsidized services like cheap transport.

Politicians can sometimes use ideological clubs to rally consent for one economic direction. Or, in other cases, they rally support for defensive measures against foreign aggression, sanctions, trade wars in developing or emerging countries, or even trade wars in developed countries with perceived rivals that are «winning» by offering cheaper goods. On a purely economic theoretical level, such critiques are leveled with economic criticism considerations:

• «Too noncompliant with international rules»

• «Non-free markets»

• «Non-free competition»

• «Too many restrictions»

Such criticisms should be dismissed as competitive strutting because they stand on fragile ground. International «rules» are valid only between equal partners in ideal situations with no sanctions, trade wars, or political and economic blackmail. No other trade or supply shocks and no national security excuses can justify it. A country’s government is foremost responsible for its own economy and citizens, and treaties and trade agreements play second fiddle. That should be engraved in the national constitution and laws as an anchor of state sovereignty. «Non-free markets,» «non-free competition,» and «too many restrictions» are other feeble excuses as markets are always dictated by internal politics and forces in an economy. Even in developed markets, many sectors are occupied by monopolists and cartels that are backed by influential investors. Developed countries abhor competition, especially if it is foreign. But they crave «economic freedom» in developing countries’ markets because their established transnational corporations are much stronger than young local companies. Who needs such an economic model?

This book should not be read as a checklist, travel guide, or recipe book with prescriptive steps but as a base from which to reassess economics in general and a country’s economy in particular. It should be a generic approach, adapted and tailor-made to every single country. It is useful to all countries:

• For developing nations, it can show the way at the beginning of the journey to make the economy as efficient as possible with the limited resources available.

• For emerging nations, it is useful to optimize the current economic situation and re-orient it in better directions.

• For developed nations, it is needed to reassess and adjust failing economic development methods and refocus on the core KPI of economics.

The Sovereign Economic Model will benefit both the people and the government of a country, whatever its current development level. The model should provide economic security with stability and predictability for the government, people, and economic operators. It should avoid disrupting systemic events that create chaos and negative effects. In that, only sovereignty can lead to stable functioning of the economic system and reduce negative external factors. Sovereignty, without external conditioning, enables governments and economic leaders to make the best decisions for the economy, country, and people. The Sovereign Economic Model prioritizes market sectors that yield the highest return of wealth (ROW). Wealth creation is the most important economic KPI.

Problems and Solutions for Liberal Economics

Limitations, vices, and excesses are hallmarks of the current liberal capitalism; it has hit a brick wall. It is afflicted by huge excesses like boom-bust cycles, bubbles, extreme financialization, and enormous debt but offers limited or no improvement for most people. Most times, it even worsens wealth distribution, purchasing power, and employment and demands higher taxes. The Sovereign Economic Model looks at alternative ways to do business, to structure a country’s economy to improve the lives of its people, and to remove the undesirable traits of capitalism. It is not intended to apply communist or socialist economic theories, but proposes a new mindset to improve current economic models so that they more closely align with the common good. Currently capitalism has the following generic disadvantages (free market failures), but they are evolved and exasperated to the limit:

• Inequality

• Financial instability/economic cycle

• Monopolies and cartels

• Environmental costs and externalities

• Greed

• Materialism

• Over-financialization

• Undemocratic practices

• Inefficient allocation of resources

• Misalignment with the «common good»

If the current system is not reined in, long-term problems will render the situation worse and cause a collapse of the financial and economic systems. Change is complex and is resisted by those who thrive on and profit from the status quo. Both China and Russia consider profiteering and excessive profits absolutely negative for the economy. They are forcing companies to diversify in economic sectors that need capital or to transfer profits into investment funds to put to good use for economic development.

One example of a problem caused by profiteering is that speculation leads to overexposure in some fields. When one economic sector becomes the rage, all investments rush into that field to reap as much profit as possible. This creates bubbles, and assets become overvalued. Over-allocation of resources in fields like real estate raises the cost of living to unbearable levels for many people.

An example of how China has prioritized the common good over profits relates to the country’s redirection of social development. China experienced an explosion of edu-tech and private tuition for kids. This allowed prosperous citizens to buy extra tuition for their children to better compete with other students in education. The differences in student achievement levels created inequalities in society and a great deal of unease in academia. China blocked these businesses, canceled their business licenses, and made the sector nonprofit by default.

Another problem is that unhealthy, addictive habits can lead to social-economic inefficiency. To mitigate this problem, China also recently introduced a one-hour limit on gaming for children. Its goal is to lessen children’s overexposure to an unhealthy addiction to online video games and screens to avoid social problems.

In inefficient industries, companies take the path of least resistance and lowest cost rather than using the latest technologies or production methods, so in time they become outdated and lose out to competitors. That was the case for German carmakers. They did not progress the automotive sector into new technologies, so competitors overtook them and conquered the market. Russia, in its various state investment programs, is strict on this issue and requires efficient production methods using the latest technologies. One example in Russia is fishing quotas, which depend on fishing vessels with high functionality and efficiency levels. Many fishing companies had to order completely new vessels to receive sufficient quotas.

Yet another issue in capitalism is inefficient capital allocation for investments. As the capitalist model has evolved with its limitations, moments of wrong and inefficient allocation of resources persist. A case in point is when a company produces extremely large profits but does not invest in R&D for new products, increased production, or higher quality. Instead, it reinvests them to make even higher profits and returns for shareholders. Boeing provides an example of preferring share buybacks to product innovation. Without R&D, its new 737 MAX suffered two crashes and production had to stop to fix the issues and redo its aviation certifications. The perception and reputation hits were huge, and sales of all Boeing airplanes are lagging.

Also, on the consumer side, the common good and the free market do not align. Thus, the government must intervene. Usually there are laws and regulating interventions to minimize the most common issues, like these:

• Price fixing

• Minimum wage

• Pollution control

• Protection of financial systems

• Workers’ rights

• Competition and antitrust laws

• Consumer rights (privacy laws)

• Restriction of products (tobacco, alcohol, junk food) for health reasons

• Restriction of services leading to dependency or addiction (gaming, gambling)

China is currently at the forefront of economic optimization and is severely curtailing and restricting unproductive and inefficient allocation of investments that have negative consequences for its economic and social well-being. While in the short-term there might be losses in GDP, the long-term benefit will be a healthier economy as investments are forced into more productive business activities. I hope that most countries follow China’s lead in this endeavor.

Short-Term vs. Long-Term Financial Allocation

Generally, private businesses prefer short-term investments, i.e., financial allocations have the best potential return on investment (ROI). But they also use KPIs such as return on assets (ROA), return on equity (ROE), or similar indicators to reap profits as quickly as possible. R&D and long-term investments are frowned upon because risk, long holding times, and uncertainties might reduce profits or even turn potential profits into losses.

Conversely, a government has longer-term strategic industry-wide or countrywide perspectives. So a government has the duty to reconcile the short-term views of private players with the long-term perspectives of government. Using carrot and stick, a government can require an industry to upgrade and become increasingly future-proof. Carrots are generous government support for development in new market sectors; sticks are strict regulation. A solid sovereign government can usually get its way even without imposing regulations. A compromise and a win-win situation are always the best paths forward for both government and investors.

Wealth Distribution Is Profit Sharing

The idea of distributing wealth comes up often in the Sovereign Economic Model. One significant occurrence is that state capitalism, through the profits of state-owned enterprises (SOEs), indirectly distributes wealth. By channeling profits to the state, the model uses the money to lower taxes, improve services, or support business. It lowers both the cost of living for citizens and the cost of doing business.

A balance between the owner of production and the workers is needed. Both Karl Marx and Friedrich Engels discussed this topic broadly, advocating for the workers to own the means of production as practiced in communism. The following might be a better way:

• Assign 20—30 percent of profits to workers.

• Assign 10—15 percent of stock as company remuneration or for voluntary purchase by employees.

Such a scheme could create a stabler balance in the economy.

Politics and the Sovereign Economic Model

The Sovereign Economic Model focuses only on economic theories for strengthening the economy. It is by itself apolitical. It is strongly driven by an attempt to fix the excesses and imbalances of liberal capitalism. The Sovereign Economic Model is not a rejection of capitalism, but an endeavor to improve its efficiency. It implicitly contains many political elements, not because of political inclinations but because economic control also implies political influence. As with any form of sovereignty, it means the country controls processes within its borders. In economic terms, economic sovereignty means a country controls the currency flow within its borders. When someone outside a country controls food, medicines, electronics, industrial production, energy, media, military hardware, land ownership, and other major businesses in that country, it means the country is not in charge of itself or is not sovereign. Therefore, the Sovereign Economic Model implicitly tries to reverse such external control. Through state capitalism, import substitution, market regulation, and industrialization, it tries to move the economic control levers back into the hands of the country and its people.

The Sovereign Economic Model also has a preponderant long-term view of economic well-being in terms of independence, self-sufficiency, and stability. Simultaneously, it tries to capture and keep the wealth created in the country. Increased competition is not a welcome concept for many of the largest international industry players and for countries with such industries. Thus, a country that follows this path faces very intense pressure. It is therefore criticized, despised, and ostracized in both the media and academia by most economic experts and stakeholders. It is sad to see that only a few countries, such as China, Russia, India (partially), and Iran, have sovereign economic policies. Others, willingly or unwillingly, have given up economic control of their country. This negatively affects their economies in the longer term.

The political implications of the Sovereign Economic Model also have an unintended political angle for countries that want to retake the reins of their economies to organize amended mechanisms suitable for local conditions. Some countries have more «socialist» inclinations. Russian President Vladimir Putin has several times mentioned the «social obligations» of businesses; in China, President Xi Jinping and the Chinese Communist Party created the concept of «common prosperity» in 2021. Both of these leaders want to remove their economies from the «liberal order» -defined status quo and its economic modus operandi. Both want to create their own flavor that is more beneficial to their own country and its citizens.