The Sovereign Economic Model. A manifesto for rising nations

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.