The Sovereign Economic Model. A manifesto for rising nations
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• Changes in regulations or taxes for foreign-owned enterprises
• Government law with declaration of public use
A government must be relatively careful with nationalization as national and international rules and regulations protect investors’ money. Spurned investors, through local courts, can ask for arbitration in international bodies and claim compensation. Large TNCs often win these cases because of backing from their home country in international courts and other countries with large TNCs. These cases then develop into international political conflicts.
Planned Economy Perception
State capitalism can be part of communism or planned, hybrid, or liberal markets, in different formats and with different names. Communist state capitalism was mainly used to reach political goals of full employment and production targets, disregarding the profits, losses, sales, need, and demand in the market for those products. There, the government carried out the plan, but in the long term the system was doomed to failure as the state wasted resources producing a lot of unusable, unneeded, or unwanted goods.
In liberal markets, the government is neutral or subjugated to the business interests of private companies. State corporations still exist as a legacy from the past. Most were established many decades ago. In time, the economy becomes increasingly private business oriented, aligning both government and business interests, but private companies dominate the economic policies. The country and its citizens rarely benefit much. In times of crisis, businesses and people ask for government intervention to allay the issues at hand.
In hybrid models, state capitalism is used to control and reap the profits of (rent-seeking) strategic industries and as a rudder for the entire economy. The profits earned are used by the government as a reserve for future times of crisis or to support the economy. These models align business with the government’s desired economic development model and policies. In time, the economy becomes hybrid, aligning both government and business interests. Government policies dominate the economy with a precise development model benefiting the country and its citizens.
How much state capitalism is needed? State capitalism is meant to control only the strategic industries of a country, mainly finance, the military, energy, telecom, and natural resources. Industries, especially light industry and services, should be mostly unregulated by the state. Instead, they should be as competitive as possible to produce goods and services at price and quality levels that can replace foreign goods and services and be exportable.
The Sovereign Economic Model, with state capitalism, takes charge of the economy. It does so by controlling both strategic sectors with SOEs and the main business infrastructure systems. It influences the general economy because the state operates the main rudder and decides the direction of most industries.
Is state capitalism a semi-hybrid planned economy? China’s and Russia’s planned economic management models can probably be called hybrids. The reason is that those countries do not control all business activities, only specific strategic economic sectors. For other sectors, they might impose certain regulations and use taxation to steer vast parts of the economy in one direction in compliance with economic policies. Government economic policies in these countries sometimes clash with private business, but they always find a reasonably positive compromise for both sides: economic direction for the government and business opportunities for companies.
Planned economy five-year plans: are they a vintage model that still can work? Old 5-year plans are being revived from the communist past. In the Soviet Union, China, and other satellites, the economy was managed using 5-year plans. Are they truly so bad? Is a (partially) planned economy that bad? In non-market economies, they were highly inefficient. They mostly decided the output of products from factories regardless of market needs, quality, or other useful parameters. Thus, items were produced but often had no buyers. Plant managers and workers received awards and incentives for wasteful production. These economic models were based on political and ideological assumptions, often with fixed prices and without considering market demand. Therefore, complex goods like cars took 10 years to be produced and delivered, while other goods categories were available in surplus. In the past, such data had to be collected, recorded, and compiled manually, which was tedious and time-consuming. By the time the data collection was completed, the facts on the ground were already different. It was almost impossible to monitor progress, but times are changing.
Currently, 5-year plans still have a bad reputation, but in fact many private companies and multinational corporations use a similar method with so-called strategic business plans for 3, 5, and 10 years. This method of planning is better adapted and is close to the market conditions studied by external consultants and internal market research. Nowadays, such plans are run with software, AI and Big Data. It is believed that a country with a sovereign economy should continue to use 5-year plans to plan and drive both political and economic forces in the right direction. This gives the country a straight path to certain goals and objectives. Therefore, financial planners can offer investors safe investment options. More so than in the past, 5-year plans are useful, relevant, and market-oriented.
Some countries have approached the «planned economics» topic with a new perspective. Compared to the past, it is now possible to apply supercomputing and software to real-time data refreshed every few minutes. An interesting software-based approach is «enterprise portfolio management,» in which software manages the construction of large infrastructure or industrial sites. The software manages the project’s timing and labor, but also its costs and materials • in short, all input and all output. Efforts are on the way, especially in Russia, to apply such theories and practices to the whole of the economy. Special economic planning software on supercomputers is being prepared and tested to monitor such economic activities. It would essentially automate the economy through AI and large computing power in real time and eliminate the inefficiencies and mistakes that come with manual calculations and management as done in previous eras.
Special Economic Zones (SEZs) are geographically designated areas set aside for specifically targeted economic activities. They usually benefit from lenient regulations compared to standards applied to the rest of the economy. They are often specific to some business sectors such as high tech, pharma, IT, and start-ups and are strongly oriented to welcome international collaboration and industries with robust growth potential. Moreover, they are touted as islands of excellence.
Can a government act as a technology driver of a planned economy? It is generally accepted that the private sector is more innovative than a stale central government, but this perception is not always correct. Often private sector actors have settled into their own procedures, processes, and inefficiencies. A government can issue edicts to elevate standards and technologies so that the private sector must follow. Often a technology push by the government is opposed and rejected by the private sector, which sees only short-term costs instead of long-term savings. Let’s consider the health care industry: often, to get a recurring prescription, patients must make a phone call for an appointment and prepare documents of previous visits. Then they must drive to the clinic, find and pay for a parking space, sit in a waiting room, and participate in the doctor’s visit. The doctor types data into the clinic’s software and voilà, finally a prescription for the pharmacy. But to streamline this process, government can impose a unified system to make appointments online, with storage of clinical records and treatments history and a chat or messaging system with doctors to request prescriptions and several other services. The private sector needs to adapt and upgrade its modus operandi and procedures to connect to the new system. Besides the health care example, such pushes can be made in the legal field and several other government-related services.
A government has a more precise overview of an economy than a single business or industry, so it is able to direct and distribute efforts and resources where they are more beneficial for the whole industry. In the same way, a highly diversified conglomerate corporation must coordinate different businesses internally to get the best financial results for the conglomerate as a whole.
The Putin Doctrine: 51 Percent State Ownership, 49 Percent to Investors
Russian President Putin has implemented one of the most clever state capitalism ownership structures. Partial privatization lets the state control most of the shares while ceding 49 percent of them to investors. Such a structure applies to several of the largest Russian companies: Gazprom (gas), RosNeft (oil), Aeroflot (airline), Sberbank (banking), and several others. This creates several advantages:
• Attracts private markets, investors, and specialists with best practices
• Removes unstable political parties bickering about company matters
• Removes the risk of political fiefdoms
• Reduces government outlay of money for full ownership
This hybrid model, as a de facto public-private partnership in running business operations, is probably one of the most efficient economic models for an SOE.
Economic infrastructure
Sovereign Strategic Business Infrastructure
Business infrastructure includes all the companies that enable the country and economy to function and that drive the main economic activities. Business infrastructure comprises both government agencies and privately run core systemic companies. The core economic sectorial companies needed to run an economy are energy, telecom, transport, and banking. Additionally, the health care and food industries are vital to a country’s citizens. The same might apply to other industries, which provide large-scale employment to the local population. It lies therefore, in the interests of a country to control such companies. Types of economic infrastructure facilities are the following:
• Utilities
• Energy
• Telecom
• Financial
• Financial institutions and payment systems
• Transport and logistics for people and goods
• Media
Utilities are most often monopolies, as building distinct instances of infrastructure is almost impossible from a financial point of view. So the base infrastructure, such as the electric grid and gas and water networks should belong to the state. Market actors can provide a variety of connectivity services as well as last-mile sales and services to end consumers. Utilities are massive companies with billions in revenue and can often generate large profits. They additionally require significant investment for upkeep and new infrastructure. They require underlying technologies with medium to high complexity, which are excellent business and provide high-value wealth creation for local industries and the domestic economy.
Energy is the most important enabler of cheap economic activity. Therefore, businesses in the energy market sector should belong to the state. The rationale is to provide the population and business with the best mix of energy at convenient prices. Energy business should limit profit-taking to pass on savings to the economy. Or it should reinvest profits into other wealth creation industries, like capital tools and technologies, for the industry itself. Endless opportunities are available in mining, oil and gas extraction, transport, storage, power generation, and renewable energy technologies to add more R&D and innovation. Otherwise, only investments to build additional capacity and power stations to sell excess energy to foreign countries are alternative options. all
The concept for the telecom sector should be identical. At least 51 percent of the physical infrastructure network should belong to the state, with market actors owning the rest. In the telecom context, state ownership can guarantee tighter national security and consumer privacy than private companies. Also, procurement decisions regarding equipment and suppliers are made centrally to manage costs and integration more accurately. The ownership of telecom companies can therefore be useful for building domestic technologies and to supply them with 4G or 5G equipment. That would start a new industry with a high level of value creation and manufacturing of medium-to-high-tech communication equipment and devices.
Banks are the foundation of all transactions for an economy. Payments are made via bank accounts of commercial entities while connected mostly via cards and payment systems between two parties in consumer transactions. A sovereign country should not only control the money via its Central Bank and regulators, but also have a significant stake in the system for stricter direct control. For systemic banks, the government should have the majority of shares or at least a golden share to veto some business practices. Payment systems, as in cards or other mechanisms, should likewise be under firm government control. In the best-case scenario, they should be local implementations instead of belonging to private hands or foreign corporations.
Media is not part of the business infrastructure per se, but is more of a government loudspeaker on the economy itself. So a government should have control of its media directly by ownership or regulation, or media should be a government-aligned business.
Transport and logistics are an important part of the business infrastructure because they move people and goods. Ports, railways, and airports are key facilities. As an economic sector in its own right, transport and logistics can give a boost to these infrastructure investments. This can foster industrial development of machinery, equipment, and industrial tools for various industries, from vehicles to tools and machines. Transport and logistics offer a high potential for automation and optimization by applying many technologies such as robotics, AI, and Big Data.
Any monopoly or rent-seeking business, if it is an unavoidable component of national economic development, should belong to the state. Then the state can run it as a state-owned enterprise and balance profits and services at the lowest cost possible for the population. That is the mindset in Europe for the health care industry, in which most essential services are free or cost only a symbolic fee. Alternatively, the state uses profits from monopoly state-owned corporations to provide free or subsidized services to society.
Specifically, control over all or most of the mentioned industries allows a government to further condition much of the economy and retain a big part of economic sovereignty. This gives it the strength required to impose additional economic policies beneficial to the country and its citizens. Despite state control of the business infrastructure, long-term well-defined strategic plans can also help private business to co-invest and build large value-added services on top of these industries.
Finance
De-financialization
Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over the economy and the government’s economic policies. Macroeconomic and financial hocus-pocus are just a panacea, but prudent financial housekeeping and long-term strategic economic policies better promote the well-being of an economy. Some financial tools are necessary and are helpful to finance new business ventures or expand current business. For example, IPOs help raise money for further development. Dividends are fair payouts that share profits and reward investors for their investments and the risks they have taken. Other tools, like bonds, are equally useful for raising additional money as long as they are reserved strictly for furthering the business and do not provide short-term profits for shareholders. Hedging reduces risks in production and can act as business insurance.
However, wealth-creating financing methods and tools make up just a small fraction of the investment world. Most merely involve trading existing assets by relying on appreciation to achieve capital gains. Any money movement that does not create wealth by increasing production is just a waste of resources and an inefficient, unproductive allocation of money. A sovereign country must strive to reduce finance so that it is applied in only a limited form, only for activities benefiting the country’s real economy.
Financing Growth
Liberal capitalist systems rely on the «invisible hand of the market» for economic development and growth. Nevertheless, it causes rushes of money to one part or another of the economy, where profits are greater. This situation is comparable to a boat tipping to the most weight-laden side. It clashes with the concept of balanced development of the economy, which should favor investments in either more undeveloped parts of the economy or those where it is more needed. When it comes to achieving balanced development, the Sovereign Economic Model and other forms of planned economics are superior in efficacy because they can influence, promote, and direct investments in those areas in need. That creates a more balanced, system-wide economic development and can raise under-developed parts of the economy. Such an economic development can be achieved with economic and fiscal policies, but also with state subsidies and favorable conditions offered to private investors. The state itself has various tools to raise money, such as bonds of different forms.
Government «people» bonds are a clever way to raise money benefiting the state and its citizens. Just before the euro appeared, many European countries sold government-backed «people mini-bonds» in local currencies and with good interest rates, allowing everyone to invest their savings in the short or medium term. This was probably the most stable and sovereign way for a state to raise money in local currency while giving its citizens an easy and safe financial investment with decent returns and keeping the debt local in local currency. They could help provide additional funding for infrastructure or other parts of the sovereign economy. The maturity of such bonds ought to be of variable length: 3, 6, or 12 months for short-term bonds. This would benefit small savers who put money aside, for example, to buy a car or a home, but want to wait before making a decision. They could invest the small capital in a safe and productive manner. Also, it benefits the local currency itself, as people are afraid of fluctuations and buy bonds in local currencies for only a short time to earn additional interest. Medium-term bonds of 24, 36, 48, or 60 months are issued in «safer» hard currencies, such as the euro or US dollar for medium-term investments. Bonds should start at 1,000 dollars or euros, maybe even less, so that normal people can earn a little extra interest on modest amounts invested. Bonds should have a low maximum limit equivalent to 100,000 dollars or euros to allow individuals to reap interest instead of large financial institutions. Similarly, accrued interest should not be taxed. Special development bonds are suitable for specific investment in market sectors. As part of the above described government bonds, some industry-specific bond types for development could be developed. Special «buckets» might be created for agriculture, e.g., storage, processing, seed production, veterinary medicine, and logistics, or for micro-electronics. Perhaps bonds could help the pharmaceutical industry to create additional factories and research centers or IT. This would allow these funds to be used in parallel to other public and private funds to make an industry sector grow, create employment, and progress.
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