The Sovereign Economic Model
A manifesto for rising nations
Stefan Demetz

© Stefan Demetz, 2022

ISBN 978-5-0056-6647-5

Created with Ridero smart publishing system

Preface

This book was born as a manifesto for changes to the liberal capitalist economic model.

I have tried to write this book in the simplest way conceivable to describe as many concepts as possible in the simplest viable form. The aim is to achieve the largest attainable reach among economics professionals and, more so, among less-well-versed decision-makers in economic matters. Another portion of the intended audience is people who do not speak English as their mother tongue. This book should be more dogmatic, philosophical, and, I hope, disruptive than plain economic numbers. To some it might sound revolutionary, to others evolutionary, and to still others plain wrong or crazy. I will try to back up my theories with real-world examples of countries’ economic policies and market mechanisms. These theories have proven themselves in the field, both in different geographies and in different political and social contexts.

As the author of this work, I do not write simply as an economist. My background is in engineering and entrepreneurship, not in economics. That has pros and cons. It means I was not constrained by classic liberal macroeconomic «faith» theories and the cult of «free markets» as taught in universities and business schools. My approach to economics is like that of an engineer to a high-performance Formula 1 or 24 Hours of Le Mans endurance racing engine. I view the economy as a complex engine comprising innumerable parts and many inputs and outputs. It needs to be high-revving to produce a high output. An engine also needs mechanisms to lubricate the various processes and let off excessive pressure as well as enough cooling to disperse excessive heat. An engine, which speeds up, decelerates, and runs under high stress, can fail if some weak parts break. A motor engine, like an economic «engine,» requires a delicate balancing act among all its components. Some components may be reliable, while others are less sturdy. Some may perform at the top of the range, while others underperform. The underperforming units hamper overall performance, limiting the highest-performing units or making their additional efforts useless. The most crucial factor is that all components are finely tuned to always give the most consistent output. Single performance indicators are less important than harmony and consistency of all indicators. Top speed does not mean much if the engine is overheating after a short while and a slowdown is necessary to bring it into an acceptable temperature range. The construction of an engine, like that of an economy, also requires some fail-safe mechanisms: failure of one part cannot be allowed to bring the system down. Last but not least, efficiency promotes competitiveness: if the inputs must be much higher to achieve similar output compared to others, it means the system is inefficient and thus uncompetitive.

I am also intrigued by countries, mainly China and Russia but also others, that use this engineering approach to their economy. They are constantly changing and tweaking mechanisms to make their economies more efficient and shock resistant • reconfiguring, fixing, upgrading, or removing the weak parts. These countries are racing ahead in economic growth and accumulation of foreign exchange reserves while growing the real economy and high-tech sector.

In this book, I also want to provide a more neutral, detailed view of some economics topics. Most academic literature seems to simply dismiss and skip them; some studies detail the historic path of specific countries, but most only skim the surface and do not consider the practical implementations and subtleties.

Further, as this is a manifesto, I felt the need to baptize this new paradigm with the concept and name of the Sovereign Economic Model to bring several concepts under one branded umbrella. I strive to propose a vision and ideas for how to apply changes to the current economic model under which a country operates.

Introduction

Is the current liberal capitalist economic model suitable for sustainable future use? No. The debt-fueled liberal (or rather anarchic) capitalist economic system imposed by the common international consensus is not fit for the purpose anymore. It does not produce real, sustainable economic growth and wealth for both the state and its citizens. Instead, it permeates the economy with the instability of unsustainable, toxic levels of debt and speculative bubbles accompanied by a misallocation of money.

This book will demonstrate the Sovereign Economic Model as a reasonable, sustainable economic growth model based on sovereign decision-making processes and the creation of real wealth. It tries to propose changes to the contemporary capitalist economic model to make it more stable and prosperous. Countries need to change their perception and understanding of economic wealth creation by means of production in order to create wealth. The Sovereign Economic Model urges changes in industrialization, trade, taxation, finance, and education policies.

In this book, I will try to lay out the central precepts of the Sovereign Economic Model as a theory and as the foundation of a sovereign wealth-creating real economy. Further, I will explore in its political and economic perspectives the increased role of the state in the national economy, economic strategies and policies, and market sectors in different stages of economic development with ideas, examples, and action plans.

The sovereign economic model

A nation that cannot control its borders is not a nation.

– Ronald Reagan

A nation that cannot control its economy is not a nation.

– Stefan Demetz

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 of the sovereign economic model

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.

In countries like the US, economic nationalism, with mottoes such as «Made in USA,» «Buy American,» and «American jobs» still stir up a sort of nationalistic, patriotic sentiment in some people. It is comparable to the Palestinian Boycott, Divestment, and Sanctions (BDS) Movement, but generalized against any foreign brands or goods.

Many think that import substitution is economic isolation, that it means blocking off all imports and becoming an economic hermit. This is not true unless complete sanctions or an embargo are involved. Sometimes there are sectoral sanctions, in which case that delimited part of the economy struggles. The import substitution relies on established supply chains and slowly starts to «indigenize» the supply chains into domestic ones. So, an industry begins with low-level economic activity and assembly of parts and only slowly, at a later stage, replaces the entire stack of suppliers with local companies. Also, usually imports are still allowed, but with high custom excises.

For some countries, especially those in Africa, a sovereign economy with import substitution was part of the plan to gain economic independence in the 1960s. So, after they achieved independence, political emancipation gave way to certain policies. These were decided upon and implemented, but without planning and foreign interference, they produced little progress.

A political will to improve the national economy is needed, and many reasons and slogans are declared, but generally no real changes occur because the status quo is convenient to most. That needs to change.

What Is Economic Sovereignty?

In a business context, sovereignty is the concept that a state or country is fully in charge of its largest businesses and business policies. To be sovereign, it needs to be free of resistance or interference from external (or externally controlled) actors who act for ideological or geopolitical reasons or sabotage business processes out of «pure greed.» Consequently, a country must firmly control its largest companies, its economic infrastructure, and its main economic driving mechanisms. With that said, often the participation of several market actors and external minority shareholders is useful for governance. It acts as a counterweight to the bureaucratic and political nature of state companies and as a benchmark for quality and product innovation.

The sovereignty, including the economic sovereignty, of a country is equivalent to the human rights that belong to a human being. It is the right of a country to have equal standing with other countries, to choose a certain path, and to make independent decisions for smoother economic growth.

Socioeconomic Implications and Influences

Several countries are trying to put forward unique visions of different variants of capitalism • trying to smooth the edges, remove the poor traits, and make it increasingly sustainable. Their visions are strikingly similar, but with different terminology coming from different perspectives and ideologies. China and Russia are ahead in implementing parts of this vision, while the West is sorely lacking.

Western stakeholder capitalism is a form of capitalism that considers the interests and needs of employers, suppliers, the local community, and others. Its goal is to create long-term value for stakeholders. It is an idea for a gentler kind of capitalism. Some, like McKinsey & Company, strongly endorse it, while others strongly criticize it. This vision is much like the Chinese and Russian views of the role of business in society, albeit using different terminology. all

In 2021, China introduced and began preaching the concept of «common prosperity.» It is derived both from communist ideology and from Confucian and East Asian philosophies. It aims to remove all «imbalances» and «excesses» from the economy, specifically the poor habits of liberal capitalism: speculation, asset bubbles, profiteering, and over-intrusion by tech companies into government business. This new philosophy will provide stronger stability in financial markets and a wider distribution of investments into more «suitable» forms of business. It reestablishes the sovereignty and primacy of the state in the economy.

Putin, in his speeches, has often said the primary priority of business is to create jobs, the second is to contribute to state coffers, and only if both of the first two conditions are satisfied can businesses enjoy their profits. In Russia, businesses are required to be team players contributing to the overall system, or they are not welcome. It makes sense in that every business must give a proportional «cut» to the larger community.

In summary, the socioeconomic implications of the Sovereign Economic Model are that a country and its people must get a more significant share of wealth from business.

Hidden Power Struggles

Economic conquest is a game the Big Powers have always practiced through their trading companies, and so it continues today. Money is power; therefore, the control of business and money translates into the political sphere of a country in the following ways.

The World Trade Organization (WTO) is an international organization that regulates trade between nations. It provides a framework to reconcile trading rules for countries with disparate types and levels of economic activity. While it should be independent and neutral, it is not impartial. It is strongly biased toward wealthier nations and their large transnational organizations. It favors them over developing countries by reducing access to technologies (intellectual property, IP), food, and pharmaceuticals. Since its inception, it has been highly negative for poor countries because it allows richer nations to use non-tariff barriers to block imports from developing nations. Infant industries in developing countries are affected particularly by WTO policies and politics. Similar to the global WTO, other regional trade agreements, especially where major differences exist between participant countries, are similarly tilted toward the wealthiest nations, who impose their rules on smaller, weaker countries. WTO and trade agreements.

International division of labor is a concept of globalization. Labor is carried out in the most «convenient» places. Some countries are «assigned» many industries, and others are excluded. It is a sort of modern feudalistic vassalage system not in the interest of a sovereign country, a theory and modus operandi pushed by international companies. They are interested in profitability due to reduced labor costs, taxes, and manufacturing and transport costs.

International financial institutions like the International Monetary Fund (IMF) and World Bank were created to help smaller, poorer countries bridge the gap to the richer countries. They were intended to finance these countries to increase their economic growth and standard of living. In fact, however, both of these organizations use finance to hinder, block, and destroy competitors of large multinational corporations in developing countries. It is well known that countries from the Eastern European post-Soviet bloc were forced to shutter business and power plants to receive financial help. This has increased the economic and political dependence of these countries on the institutions themselves while lowering their chance to implement locally suitable economic policies with existing market sectors. IMF, World Bank, and other international institutions.

The economic sovereignty of a country is measured using different indicators: Measurements of economic sovereignty.

• Political sovereignty to decide economic development model and policies

• Control of strategic sectors and business ecosystems

• Independence of food, energy, and technologies

• Ability to produce most strategically important goods and services

Often, poor countries or those in trouble due to war, natural disasters, or other factors are offered generous financial aid. This ostensible help from outside is always tied to political and economic conditions. Such covenants include adherence to disadvantageous terms often in the form of trade treaties, forced privatizations, forced closure of competitors, market access, political concessions, or military access to the territory.

In developing and emerging countries, many people complain of economic colonialism base on money, finance, trade and technology. Stronger and richer countries use financial tools to impose colonialism on smaller and weaker countries, creating resentment. These tools might be any of the following: Economic colonialism for developing and emerging markets.

• Currency exchange pegging to the US dollar

• Payment systems

• Credit cards

• Financial standards

• Financial education

Many large TNCs have colonized smaller or weaker countries using tools of commercial colonialism. By using their vast array of brands and goods, their financial power, and the political force of their home countries, they have pushed the door down and taken over the markets. The host countries could not impede this colonization due to their lack of economic defenses and their inherently weak economies. It is noticeable in many countries that fast-moving consumer goods (FMCGs) made by companies in only a few countries are available. These goods come mainly from US and UK companies, while companies from other regions, such as Europe, are completely missing from the market.

Some economic commentators have pointed out that the developed nations establish and use technological colonialism as a power lever against smaller countries. To some countries, the developed nations deny the right to buy certain technologies by making excuses or imposing sanctions. They do so to put pressure on the smaller countries or to slow their development or progress.

Use of economic instruments by leading nations is a means of geopolitical primacy. It always has been and always will be.

The Competitive Advantages of Nations

In the past, cities, trading posts, fortifications, and ports were built in strategic geographic locations for trading, security, safety, and easy access to natural resources like water and fertile land. Cities were erected near rivers and cultivable land, fortifications on easily defensible hills and mountaintops, trading posts on bustling trading routes or near production areas, and ports in defensible bays with quiet, protected waters. These strategic locations are constantly contested by many countries for military and trading advantages. Many countries still enjoy competitive advantages given by geography and have adapted their economies to take advantage of that. Therefore, most countries have some sort of advantage over others in certain categories of goods. Most times, this advantage has been built upon to create extensive economic activity and even advanced industries. Some industries have ended for various reasons, such as replacement by newer technologies or simply finite resources. It is in the interest of countries to identify such competitive advantages and build on them. They may be simple things like water, large land surfaces, or natural resources. These sectors should constitute the foundation of an economy. Catalysts to economic development are categorized into two macro groups:

• Naturally occurring competitive advantages

• Evolutionary development from agriculture, natural resources, and infrastructure

Natural competitive advantages should be used for evolutionary economic development. Once competitive advantages have been identified, both historical and new ones, the focus should be to take advantage of them by progressing and innovating to achieve quick evolutionary developments. As a base, agriculture, natural resources, and infrastructure are used to improve the economy. Even at a basic level, because they require tremendous manual input, these sectors need automation and innovation by machines, tools, materials, and technologies. The footprint of such primary goods and activity is unusually large, and there are huge margins to start production of capital goods as a part of import substitution programs. This brings a considerable drive to upgrade a country’s skills and industrialization and affects many sectors. Agriculture and food production require a vast variety of machines and industrial processes to convert raw agricultural products into tradeable goods with added value. Natural resources require many large industrial machines to transport, filter, and process raw material extracted from underground. Infrastructure, beyond the construction stages, needs machines and vehicles to transport people and goods, so it is an excellent starting point for heavy industry.

Moreover, all three «basic» industries of agriculture, natural resources, and infrastructure impact other industries, such as the chemical industry, because they require hundreds or thousands of substances for processing. A key government task is to identify the most critical or convenient industries and goods to bet on by considering their benefits to the economy. A government must assess the nation’s industrial and technological capabilities and skills, internal demand, competitiveness, exportability, and a variety of other economic and strategic factors. Once this analysis is done, a country can plan the next steps of its economic development evolution.

Regional Raison d’être of the Sovereign Economic Model

Within countries, often regions or states in a federal political system are granted a certain autonomy in economic matters. Taxation might be different, and local laws might have precedence over federal and other autonomous prerogatives. Therefore, even a semi-independent region of a country might mold its economy quasi-independently of the central government. For example, a regional legislature can certainly use the Sovereign Economic Model as an inspiration. Regional administrations have leeway given their partial autonomy to create local economic plans and investment opportunities, which are ideal for small and mid-sized companies with a large local presence and local interests. Thus, even local administrations can make smart, independent choices and apply economic policies for the benefit of both businesses and residents.

Economics of the sovereign economic model

Wealth Creation as the Economic Ideal of the Sovereign Economic Model

A long-forgotten basic tenet of economics is that wealth is created by raw resources and labor with the manufacture of physical goods. In the modern era, that concept is partly extended to goods built with non-physical, intellectual labor. Capital allows businesses to increase their production by utilizing more labor, more resources, and more capital goods. Money, if not used in the production process, is merely a convention for the exchange or accumulation of wealth, a measurement tool. Money is used to buy goods, which requires a producer to create even more goods to replace those sold. Until this arrangement ends, money does not equal wealth. This is why the Sovereign Economic Model prefers a widespread and large distribution of money instead of an enormous concentration of wealth in a privileged few people.

Once the model has been implemented, only the real economy can create wealth. The primary and secondary sectors of an economy, agriculture and manufacturing, are the catalysts. The service sector adds services to a finished product and manages the surplus wealth. This sector includes sales, distribution, repairs, servicing, professional services, and finance • services that merely reuse and recycle money by shifting it in one or several directions while producing little or nothing. Perhaps incoming tourism is the only exception, as its geographic and cultural nature attract many people. This creates demand and thus the construction of infrastructure, real estate, and increased food production. The knowledge economy, as a quaternary sector, adds technologies like artificial intelligence (AI), Big Data, and robotics to automate mechanical and industrial processes by making finer use of data.

Under the Sovereign Economic Model, a strong distinction will be drawn between different wealth operators:

• Wealth creators produce a typically physical object using labor and raw resources.

• Wealth recyclers add services to a finished good or wealth by recycling wealth.

• Wealth consumers produce unproductive output that consumes wealth.

• Wealth destroyers render a physical object less valuable, e.g., natural disaster, wars, inefficient government, crime, over-taxation, misallocation of funds, and bankruptcies.

The concept of wealth is truly important as some business activities create real wealth, while others do not. A sovereign country creates the right conditions to make creation of wealth more convenient.

Sovereign Economic Margins

Let us suppose a carmaker in Country 1 that produces and sells a cool million units of $100,000 cars. It has produced $100 billion in products. As a finished good, this number will count toward GDP. Consider two scenarios:

1. All suppliers are building all of the vehicles’ parts in the country, but said business activity is not included in GDP calculations because it is the last stage of production.

2. All suppliers’ parts are built in another country, so the production of cars is counted in Country 1 as $100 billion of GDP and the suppliers’ business is counted as $70 billion of GDP in Country 2 because it is the last stage of production in that country.

In Scenario 1, $100 billion is counted, all-inclusive, while in Scenario 2, $100 billion is counted for Country 1 and $70 billion is counted for Country 2, a total of $170 billion.

What happened in reality? In Country 1, $30 billion of wealth was created; in Country 2, $70 billion was created. So Country 1 was credited with $100 billion of GDP, but only created $30 billion of wealth. In fact, Country 2 produced 70 percent of the wealth, more than double that of Country 1.

The Sovereign Economic Model prefers to focus on wealth creation and not just meaningless GDP numbers. This concept can be called the sovereign economic margin. That is why, with industrialization and import substitution policies, wealth is created. It happens with the production of final goods and the sub-production of intermediate goods or parts within a country. Anything built in another country and imported is wealth for the producing foreign country. Employment is wealth. Employment implies the use of labor for useful productive activities, so the more productive workers, the more wealth creation increases. Evidently, not all employment means doing productive tasks; some types even destroy wealth, such as in these cases:

• The cost of employment is higher than the wealth produced (e.g., communism).

• Bureaucracy is slowing down wealth creation.

• Wealth is offset by productive activities with high adverse social costs.

As with any other improvement process, the reduction of defects, i.e., unproductive economic activities, is a significant step in the right direction.

Wealth Creation Instead of GDP as a KPI for Economic Policies

Understanding the principles of wealth creation allows governments to devise economic policies and related legal and fiscal frameworks to stimulate creation and creators of wealth. Also, their policies must rein in wealth wasters and wealth destroyers. While GDP is easier to count and show off, it is a highly unreliable accounting method. It is often abused and massaged to suit political needs. Unexpectedly, Japan’s longtime manipulation of GDP numbers was recently exposed. Wealth creation is unquestionably a more precise indicator.

There are four horsemen of wealth creation:

, with raw resources, is an essential input for production that transforms resources from natural elements into intermediate or finished goods. It includes both physical and intellectual work. Tools, machinery, and equipment can help increase the amount of production a worker can output. This increase is called productivity. 1. Labor

, with labor, are essential inputs for production as the basic building blocks to manufacture any category of goods. They may be either natural elements or energy sources. 2. Raw resources

is an important catalyst of production. It finances increased labor, raw resources, or knowledge to produce a larger number of items or items with a higher value, creating superior levels of wealth. Capital by itself cannot be wealth. 3. Capital

allows the production of increasingly complex, higher-wealth products. High-tech industries need input from thousands of highly educated and skilled specialists. Knowledge can therefore be a consequence of long experience doing a particular job. 4. Knowledge

These four input factors create wealth. Offshoring manufacturing and production moves the wealth creation process to those countries. In times when a knowledge economy prevails, offshoring outsources the knowledge and teaches it to a potential competitor, so it is always a bad idea in the long term.

Business Environment in a Sovereign Economic Model

«What’s in for me?» is the question most ask. For every rule and regulation, people and business evaluate the changed status quo and ask this question. While the government tries to use carrot and stick and to balance pros and cons with the interests of various stakeholders, the fact of life is that some will win and some will lose.

In state capitalism, the government takes ownership or majority control of companies in strategic sectors of the economy. This creates a big headache for private companies in that sector, who are asking what’s in it for them. If the state-owned enterprises are non-aggressive and compete fairly, not using specially biased laws in their favor, competition is normal, as with other private companies. They may sometimes even collaborate to create common tech or cooperate with foreign operations. In fair conditions, the government is interested in a tide that lifts all boats. This is the case in Russia, with Novatek as the largest LNG exporter and Lukoil as the second-largest oil company; both companies happily coexist with state giants Gazprom and RosNeft. On the contrary, if the government behaves aggressively and moves into some sectors, companies and their owners must drastically adapt. Some might even have to sell a majority stake or the entire company at a fair market price because they cannot resist the onslaught from the government.

In the Sovereign Economic Model, the economic KPI is wealth creation. The sectors producing wealth are agriculture (first sector of the economy), industry (second sector) and the knowledge economy (quaternary sector). Therefore, these fields will receive the most state support, effort, and attention. Industrialization, exports, and import substitution are policies meant to drive real production and thus the real economy. Consequently, the service sector will not get preferential treatment. Similar activities that do not bring prosperity to the country and its people are also excluded. Economic policies should favor large capital flows into wealth-creating industries and out of less productive ones. Inefficient industries and unproductive industries will suffer the most as the state limits and curtails them. Such a situation is noticeable in China, where the government has cut back on economic excesses, speculation, and other systemic imbalances.

Each rule change produces winners and losers. If a government implements economic policies favoring the wealth creation KPI, there will be a set of winners and losers.

The winners

• People will win as increasing employment and wider wealth distribution give them a more comfortable lifestyle.

• Governments will win as increased production brings greater tax revenue and consequently more well-balanced budgets.

• Agriculture, infrastructure, industry, and high tech will win as they will be the net receivers of government attention, subsidies, and lower taxes.

• The service industry will win as more people will have surplus wealth to spend on a variety of services, such as vacations, entertainment, and personal care.

The losers

• Companies relying on rent-seeking businesses will lose out against government.

• Financial services will lose as unproductive investments and mere accumulation will be curbed.

• Products and services promoting unproductive activities will be restricted.

• Economic activities with high social costs will be regulated strictly. Examples:

• Taxation of sodas and junk food, coupled with a de-taxation of healthy or less unhealthy foods

• Taxation of ecologically polluting materials

Economic policy creation and changes must consider potential winners and losers. A government can, with prior notice and support, steer the businesses in new directions.

How to Apply the Sovereign Economic Model by Level of Development

The Sovereign Economic Model contains concepts that have usually been applied in developed nations when they were developing and emerging countries themselves. Most countries have had to protect their markets, such as the US at the end of the 19th and beginning of the 20th centuries; most European countries after World War II; Japan and South Korea slightly later; and many countries in Africa and Latin America in the 1960s and 1970s when, after being colonies, they became independent.

Countries in the developing phase should focus on these priorities:

• Agriculture, natural resources, and infrastructure

• Low-to-medium-technology industry

• One high-tech industry as a national priority

Emerging countries should ponder the following policies:

• Maintain the focus on agriculture, natural resources, and infrastructure.

• Increase focus on the high-value medium-high technology industry.

• Focus on at least one high-value high-tech industry as a national priority.

• Start focusing on the knowledge economy.

Even developed nations, as they stand, have not completed their evolution curve. Many argue that they have started a regression in the past decade, like a playground swing in a park hitting its peak below potential, then stopping and moving backwards. Over-financialization has crept in, and the focus on their core industries and wealth-creating economic sectors has been lost. Speculative investments and other unproductive allocations of money have created more industries of hype than ever. The valuation of assets is wrongly given a higher priority than production, employment, and profits. Government policies and national economic KPIs have changed to achieve quick Pyrrhic victories in perception, but not substance or progress. The toxic addiction to debt, especially long-term debt, is sapping wealth as government interest payments. Unfortunately, debt produces a near-zero percentage of GDP increase and no wealth. In many companies with legendary heritage, products have been watered down and their intrinsic quality and value characteristics flushed out to increase sales and maximize production. The management of developed countries and their business itself is being distracted by ever-increasing marginal issues and useless new fads. Actions of management are big announcements, costs, and time wasted, but without concrete changes or results moving the economic wagon forward. Inefficiencies have crept into the system through outdated infrastructure, outdated processes, and outdated systemic operators, both government and connected business. Bureaucracy and red tape in many countries still require people to transport paperwork in person. People need to visit five different agencies in five different offices during office hours instead of communicating through an online system, which can process such data in a few seconds or minutes at any time of day or night. Education systems have softened to adapt to these new realities instead of insisting on meritocracy and improving the academic curricula, and levels have been lowered by the Bologna Process and Common Core curricula. Rigorous academic tradition was thus demoted to let anyone take part instead of maintaining rigor through an academic selection process.

To roll back, most countries need to take stock and refocus on the core systemic issues of their economies. Cures for rotting economies are needed. It is hard to take stock of bad habits and reassess priorities, but it needs to be done. A list of action steps will need to be prepared and started to change the status quo and introduce new best practices. The following might be some of these steps:

• Increase speed and efficiency of government services for business and people.

• Remove inefficient and unproductive capital allocations from the market.

• Return to conservative economic policies with frugal use of debt.

• Change economic KPIs and steer government support toward them.

• Rebuild infrastructure to include the latest technologies.

• Keep the focus on wealth-generating economic sectors: agriculture, natural resources, infrastructure, industry, and the knowledge economy.

• Return the focus to high-value, high-wealth industry sectors.

• Focus on at least one high-tech industry as a national priority.

• Revert the education system to old-style meritocracy, but implement new-style curricula to support the wealth-creating industry sectors first.

Depending on the stage of development and structure of their economy, countries need to implement economic policies that benefit their real economic growth.

Clarity of Vision and Policies Is the Key

As changes occur, communication of such policies needs to occur in advance to spell out the vision, and the rules need to be clear and detailed. It should function similar to a car’s turn signals, which indicate the direction the car will take in the road and future ahead. A country doing just that is China. Its five-year plan programmatic document perfectly delineates the country’s vision, directions, and action plan in the years ahead. By taking this step, businesses can avoid being unprepared and may even ask for help to align themselves with the new rules. Clarity of vision and clear communication are essential to decrease criticisms and uncertainty.

State capitalism

That which is not good for the beehive cannot be good for the bees.

– Marcus Aurelius, Roman emperor and philosopher, AD 161—180

State Capitalism as Guided Capitalism

State capitalism is usually wrongly associated with communism. In that system, the state owns any type of business activity with central planning of labor and input/output. Communism has been shown as effective only in certain situations with heavy crises or a war economy. In that context, the state needed to direct resources and lots of production in a predetermined direction, such as rearmament or postwar recovery and reconstruction. Mostly forgotten is the use of state capitalism in the post-war recovery of Europe and East Asia after World War II. Then, state-led development corporations and state-owned enterprises (SOEs) rebuilt economies ravaged by war. all

Despite its supposed similarity to communism, all countries practice some form of state capitalism, or economic interventionism. Some openly admit and carry it as part of a national economic model. Such countries might be from the former Soviet or communist bloc, or countries formerly associated with the USSR. Some less advanced countries also favor employment over other economic factors. Self-declared liberal countries apply ad hoc economic interventions for corporations «too big to fail» or «too important to fail,» or they apply corporate welfare to please extremely powerful lobbies, which results in various forms of economic distortion. Here the state uses subsidies, regulations, and price controls to help national companies, erect non-tariff hurdles to ward off foreign competition, and fix prices to protect an industry or wages (minimum wage) that secure some social stability. Tax credits, tax incentives, and tax exemptions are used to support business sectors or regional areas or to help establish new industries. For example, in the green energy business, less environmentally friendly fuels and fossil fuels are penalized. Regulations can elevate local standards in ways that leave foreign companies struggling to keep up or require huge expenses to realign. Others, especially those with wealth created by natural resources like oil, gas, and mining, have created sovereign wealth funds to hoard profits from the extraction industries.

Another good reason for state capitalism is that the government can act similar to the spring in a car’s shock absorber and like a rudder on the economy to absorb economic shocks and volatility and to steer some business practices. For example, a government can require the use of certain national technologies to improve the economy instead of letting companies choose. This might not be efficient in the short term, and it may cost some private companies’ profits, but it can be a winning strategy in the long term because such policies ultimately build up domestic industries. It is a trick to effectively make some industries subsidize others.

Is state capitalism too top-down? One mistake of communism is its desire to control business activity, down to individual small businesses. State capitalism instead wants to control the major strategic sectors of the economy and regulate some others. Instead, in non-strategic sectors, such as light industry and services, the sovereign state should make rules that foster innovation and competition. This can be accomplished through low taxes and regulations, strong competition, and antitrust law. Other measures, too, are implemented to allow business to flourish without interference. all

Capital, the Real Economy, and Wealth Creation in State Capitalism

Capital is a required element for wealth creation. State capitalism, by ownership and control of strategic industries, makes sure that capital, as profits, gets reinvested in industries that create wealth. State capitalism effectively monopolizes rent-seeking industries and market sectors, which produce most capital in the form of profits and dividends. A state can use that profit to reinvest in the real economy’s industries and reduce non-working capital in the economy.

Through such investment, state capitalism can be an effective strategy for economic development. One shortfall of liberal capitalism is that it is not aligned with the needs and strategic direction of a country: private businesses just chase profit or money accumulation. Usually in liberal capitalism, this is obviated by legislation and taxation to encourage private businesses to invest and enter a specific market segment. This investment is rarely encouraged to effectively meet a need, but more for declaring success by showing off highly questionable GDP numbers. In capitalism, money, like water, flows where there is less resistance and gives higher returns. So investors prefer to invest in fast food or coffee chains instead of in big industrial enterprises, which come with higher risk, longer production times, and fewer returns. Money, like water, can flow where it is unnecessary, where it does not bring benefits to the country, its people, and the wider local community. More refined forms of state capitalism as practiced in the Sovereign Economic Model are comparable to the management of water resources, such as riverbeds, basins, and coasts. Water, like money, must be directed in ways that create not disasters, but benefits to the local community.

State Capitalism 3.0 is the latest upgrade and current version. At the present moment, it is viewed as the third version after two iterations in the 19th and the 20th centuries. Currently, it is practiced to meet the following goals:

• Protect the financial markets from globalization and foreign ownership.

• Create a central bank to protect the national banking institutions.

• Progress development to the level of the most advanced countries.

• Establish a hybrid state capital.

• Promote state-led capital accumulation.

Several types of state capitalism exist. It has many forms, depending on the country and mindset:

• Some are derived from geopolitical issues, with sanctions and trade wars pushing a country to adopt passive or active forms to fight off foreign countries and their companies.

• Ideological state capitalism is more inclined to stabilization and socially relevant topics like protection of society from financialization and globalization.

• Protectionist state capitalism is more preoccupied with defending the market from foreign invasion.

• Competitive state capitalism uses this form to compete, often unfairly, with other countries.

No prescribed model of state capitalism exists and there is no formula to define which is best or even what works. The best model to use is tailor-made for the country and brings the greatest benefits to its economy.

State-Owned Enterprises as Representatives of State Capitalism

Many liberal countries, despite their self-acclaimed free markets and capitalism, own several state-owned enterprises (SOEs). Examples are Amtrak rail network in the US, banks in the UK, the alcohol monopoly in Sweden, and utilities in many countries. Germany even has a state-owned beer brewery. Further, many SOEs are owned by regional or local governments and municipalities.

SOEs can have many modus operandi, depending on their political context. The tactics used, even on the internal market, may be passive and defensive or offensive and aggressive. In the first case, SOEs compete for the market share fairly, collaborating even with private businesses. In the second case, they compete aggressively and use government political power to introduce laws that benefit them, gain monopolistic positions, and push private business out of the market.

Management and governance of SOEs is a sore point. In some oil and gas exporting countries, large SOEs are mainly concerned with managing the enormous wealth of this market sector. Most are run decently or well as they are critical to state budgets. In many other fields, SOEs were, and are, badly managed. Mainly they are subjected to political tussles, run by politically appointed leaders, and used as overweight cash cows until the business environment, through heightened competition or technological changes, reduces them to a burdensome money-losing enterprise that gets privatized quickly. Relevant examples are the post offices of various countries, which have been privatized or floated on stock markets, or have suffered gargantuan losses. For instance, consider the US Postal Service (USPS), which is technically not an SOE but a special government agency, and Amtrak, the US railway operator. In monocratic government systems in Asia, SOEs fare relatively well as the governments set strict rules that administrators must follow. Deviations or political fiefdom (corruption) are harshly punished, up to death sentence. Putin’s Russia has perhaps struck the perfect «golden middle.» Many of Russia’s large SOEs, such as Gazprom (gas), RosNeft (oil), and Sberbank (banking) are traded on the stock market; the state owns slightly over 50 percent, and the rest belongs to private and minority shareholders. Therefore, the state has achieved several goals: absolute control and money along with liquidity and partial privatization. The boards and management of these companies are stuffed with foreign executives. In this way, local politicians cannot defy the shareholders’ governance and run their fiefdoms, as would be expected to happen with only local governance.

Competition or merges between SOEs is a point that needs to be analyzed. Some countries have multiple state-owned enterprises in one sector: multiple banks, multiple industries, or multiple utilities competing in a market. Sometimes it makes sense to completely merge them or to bring them under the roof of one holding group to manage them under one policy. In other instances, it is advisable to keep them separate because their core functions are different. Competition among multiple SOEs for the same customer does not make much sense because a large amount of time, financial resources, and political intrigue are spent on competition instead of on improving the offering. In these cases it is better to rationalize and merge these strikingly similar businesses. In addition, consolidation of SOEs can bring big cost savings, especially if they are large. Either a total merge or a common management as subsidiaries of a large conglomerate can make many processes and decisions much faster and highly efficient. A larger aggregated size likewise helps to fend off competition from private and foreign businesses. It also adds to the enterprise’s credibility for exporting goods and services abroad. Both China and Russia have merged and rationalized different SOEs into large conglomerates in the fields of energy and manufacturing. This makes them gain critical mass and reduces costs. Russia has merged hundreds of related firms into conglomerates in aviation, shipbuilding, engine and turbine manufacturing, and other sectors. This consolidation has allowed distributed single businesses to become increasingly productive as part of a conglomerate and work together under one umbrella to bring new products to life.

In the final analysis, well-managed state-owned enterprises can provide a stable economy and can also create growth and prosperity no less efficiently and effectively than private businesses.

State Capitalism Investment Models

A sovereign country should primarily use its economic policies to create the right foundations for business. But it can also use various tools to fund its development. These tools can be funds, SOEs, or agencies.

Sovereign wealth funds are special funds accumulated by a country, usually by oil-rich nations in the Middle East, Norway, and Russia. In most cases these funds are simply intended to optimize returns, that is, to make the most efficient investments anywhere around the globe, and thus operate just like an investor. Sometimes they are mixed. In addition, they invest internally, meaning they finance business in their home country. For example, in Russia, the sovereign wealth fund RDIF invests and co-invests mainly internally. The most prominent example of its investment is the Sputnik V vaccine for COVID-19.

SOEs have historically been tied to energy, i.e., oil and utilities, probably because these industries are critical to state budgets. While in the West these have been mostly or partly privatized, in many countries state-owned utilities are the norm. In developed countries, few state-owned companies exist, while in emerging countries they are common. As a paradox, historically, the biggest growth seems to have happened while the state had a larger ownership of entire industries, both in Europe and in Asia.

The state itself, through its government, can influence business with economic policies, taxation, regulation, and permits. In fully deregulated capitalist countries, the government does not pose many obstacles to business. It even supports the largest companies. Usually the government has to step in if a critical business suffers significant losses or faces bankruptcy. However, in state capitalism, the state heavily regulates some sectors of the economy, owns or controls extensive business, and effectively has a de facto monopoly on strategic industries.

State capitalism allows a country to move a huge amount of resources to implement a plan. The state can move state-owned companies, sovereign funds, and internal funds to support an industry. This combination of finance, labor, and technological skills makes it easier to complete large-scale projects. Imagine a railroad infrastructure upgrade: the state provides financing, a sovereign fund attracts foreign co-investment, state and private companies provide the technology (fast trains, management systems), and state-owned or private construction firms manage the project.

State capitalism has its own mechanism for investment. Investment strategies prioritize long-term improvement of the general economy. Infrastructure, employment, and internal development of industrial and technological market sectors and solutions are investment solutions that spend the money within the country. Comparatively, unbridled capitalism is not about raising the tide to lift all boats, as it is more self-centered and the benefits are restricted to each individual company.

State capitalism is not a silver bullet for all sectors of the economy. These are the areas where state capitalism can best be applied to market sectors:

• Power engineering (electric, nuclear)

• Military-industrial complex

• Banking

• Chemicals (including fertilizers)

• Pharmaceuticals (partial)

• Public utilities

• Mining and metallurgy

• Ports and logistics

• Railways

The telecommunications sector should also be controlled by the state because a telecom network is a fundamental part of the infrastructure for the internet and data transmission. Here, state control of the physical grid network is of paramount importance. Besides promoting state security, it may help domestic companies that produce telecom equipment if such constraints are introduced. Private companies can, together, be minority shareholders of the physical infrastructure. On the business side, they operate as virtual operators and take charge of the service aspect for consumers.

The sovereign economy described in the Sovereign Economic Model also controls the food-distribution system and, consequently, the largest supermarket chains. Such food distribution networks are controlled by the state, but with the participation of all food producers as shareholders and suppliers. In Sweden, alcohol is sold at the retail level only in government-owned retail chains. In other countries, like the UK, Italy, and Switzerland, many cooperatives are running supermarket chains.

On the whole, investment models in state capitalism can provide sound economic progress and in some cases are more dynamic than very large companies. In the best-case scenarios, they are the start of an avalanche, as besides the initial state-backed investment vehicle, academia, SOEs, and even private companies can also get involved.

Control of Assets: State vs. Private Property

One process a sovereign country must engage in is control of the most strategic sectors of the economy and systemic companies. Many companies are in private hands, so how can a state achieve control? A government has many levers, especially the legislature and law enforcement. A government may create laws to nationalize companies or to put so many sticks in the wheel that the business becomes less attractive to investors or even becomes unviable in private hands.

Re-nationalization or reverse privatization can be options for regaining lost assets. Where assets were privatized using illegal methods, such as bribes, a state can nationalize a business without compensation. In addition, gross negligence and tax avoidance or evasion are good reasons for a state to seize the business. Here, a state might pursue de-privatization by purchasing a controlling or golden share of a company on the open market or through a direct acquisition. The owners are compensated or given incentives to cede control. If a company is struggling with financial debt, the company itself is sequestered by the government and nationalized or bought during bankruptcy proceedings.

Alienation by extreme measures or stealth are yet other methods. The previous two methods involved solid legal or business methods for the state to take control of assets. However, sometimes the state may use all the tools available, even disputable ones, to take the asset. The pressure exerted by a government can lead to alienation of the assets, in which the owner decides it is more convenient to cede control.

Tax investigations may be launched against the main shareholders, the business may be embargoed by government procurement, or other tools could be used to seize control, such as the following:

• Non-renewal of licenses, e.g., telecom companies

• Vexing taxation on extraction of natural resources

• Boycott of government procurement

• Government buy-in of controlling or golden shares

• Restriction of business sectors to government agencies

• 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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