• 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 ofВ wealth is truly important as some business activities create real wealth, while others do not. AВ sovereign country creates the right conditions toВ make creation ofВ wealth more convenient.
Sovereign Economic Margins
Let us suppose aВ carmaker inВ Country 1В that produces and sells aВ cool million units ofВ $100,000В cars. It has produced $100В billion inВ products. As aВ 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.
InВ Scenario 1, $100В billion is counted, all-inclusive, while inВ Scenario 2, $100В billion is counted for Country 1В and $70В billion is counted for Country 2, aВ total ofВ $170В billion.
What happened inВ reality? InВ Country 1, $30В billion ofВ wealth was created; inВ Country 2, $70В billion was created. So Country 1В was credited with $100В billion ofВ GDP, but only created $30В billion ofВ wealth. InВ fact, Country 2В produced 70В percent ofВ the wealth, more than double that ofВ CountryВ 1.
The Sovereign Economic Model prefers toВ 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 ofВ final goods and the sub-production ofВ intermediate goods or parts within aВ country. Anything built inВ another country and imported is wealth for the producing foreign country. Employment is wealth. Employment implies the use ofВ 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 inВ 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 ofВ defects, i.e., unproductive economic activities, is aВ significant step inВ the right direction.
Wealth Creation Instead ofВ GDP as aВ 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 ofВ wealth creation:
1. Labor, 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 ofВ production aВ worker can output. This increase is called productivity.
2. Raw resources, with labor, are essential inputs for production as the basic building blocks toВ manufacture any category ofВ goods. They may be either natural elements or energy sources.
3.Capital is an important catalyst ofВ production. It finances increased labor, raw resources, or knowledge toВ produce aВ larger number ofВ items or items with aВ higher value, creating superior levels ofВ wealth. Capital byВ itself cannot be wealth.
4. Knowledge allows the production ofВ increasingly complex, higher-wealth products. High-tech industries need input from thousands ofВ highly educated and skilled specialists. Knowledge can therefore be aВ consequence ofВ long experience doing aВ particularВ job.
These four input factors create wealth. Offshoring manufacturing and production moves the wealth creation process toВ those countries. InВ times when aВ knowledge economy prevails, offshoring outsources the knowledge and teaches it toВ aВ potential competitor, so it is always aВ bad idea inВ the long term.
Business Environment inВ aВ 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.
InВ the Sovereign Economic Model, the economic KPI is wealth creation. The sectors producing wealth are agriculture (first sector ofВ 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 toВ drive real production and thus the real economy. Consequently, the service sector will not get preferential treatment. Similar activities that do not bring prosperity toВ the country and its people are also excluded. Economic policies should favor large capital flows into wealth-creating industries and out ofВ less productive ones. Inefficient industries and unproductive industries will suffer the most as the state limits and curtails them. Such aВ situation is noticeable inВ China, where the government has cut back on economic excesses, speculation, and other systemic imbalances.
Each rule change produces winners and losers. If aВ government implements economic policies favoring the wealth creation KPI, there will be aВ set ofВ 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. AВ government can, with prior notice and support, steer the businesses inВ new directions.
How toВ Apply the Sovereign Economic Model byВ Level ofВ Development
The Sovereign Economic Model contains concepts that have usually been applied inВ developed nations when they were developing and emerging countries themselves. Most countries have had toВ protect their markets, such as the US at the end ofВ the 19th and beginning ofВ the 20th centuries; most European countries after World War II; Japan and South Korea slightly later; and many countries inВ Africa and Latin America inВ the 1960s and 1970s when, after being colonies, they became independent.
Countries inВ 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 aВ regression inВ the past decade, like aВ playground swing inВ aВ 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 ofВ money have created more industries ofВ hype than ever. The valuation ofВ assets is wrongly given aВ higher priority than production, employment, and profits. Government policies and national economic KPIs have changed toВ achieve quick Pyrrhic victories inВ perception, but not substance or progress. The toxic addiction toВ debt, especially long-term debt, is sapping wealth as government interest payments. Unfortunately, debt produces aВ near-zero percentage ofВ GDP increase and no wealth. InВ many companies with legendary heritage, products have been watered down and their intrinsic quality and value characteristics flushed out toВ increase sales and maximize production. The management ofВ developed countries and their business itself is being distracted byВ ever-increasing marginal issues and useless new fads. Actions ofВ 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 inВ many countries still require people toВ transport paperwork inВ person. People need toВ visit five different agencies inВ five different offices during office hours instead ofВ communicating through an online system, which can process such data inВ aВ few seconds or minutes at any time ofВ day or night. Education systems have softened toВ adapt toВ these new realities instead ofВ insisting on meritocracy and improving the academic curricula, and levels have been lowered byВ the Bologna Process and Common Core curricula. Rigorous academic tradition was thus demoted toВ let anyone take part instead ofВ maintaining rigor through an academic selection process.
ToВ roll back, most countries need toВ take stock and refocus on the core systemic issues ofВ their economies. Cures for rotting economies are needed. It is hard toВ take stock ofВ bad habits and reassess priorities, but it needs toВ be done. AВ list ofВ action steps will need toВ be prepared and started toВ change the status quo and introduce new best practices. The following might be some ofВ 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 ofВ development and structure ofВ their economy, countries need toВ implement economic policies that benefit their real economic growth.
Clarity ofВ Vision and Policies Is theВ 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. InВ that system, the state owns any type ofВ business activity with central planning ofВ labor and input/output. Communism has been shown as effective only inВ certain situations with heavy crises or aВ war economy. InВ that context, the state needed toВ direct all resources and lots ofВ production inВ aВ predetermined direction, such as rearmament or postwar recovery and reconstruction. Mostly forgotten is the use ofВ state capitalism inВ the post-war recovery ofВ Europe and East Asia after World War II. Then, state-led development corporations and state-owned enterprises (SOEs) rebuilt economies ravaged byВ war.
Despite its supposed similarity toВ communism, all countries practice some form ofВ state capitalism, or economic interventionism. Some openly admit and carry it as part ofВ aВ 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 В«too big toВ failВ» or В«too important toВ fail,В» or they apply corporate welfare toВ please extremely powerful lobbies, which results inВ various forms ofВ economic distortion. Here the state uses subsidies, regulations, and price controls toВ help national companies, erect non-tariff hurdles toВ ward off foreign competition, and fix prices toВ protect an industry or wages (minimum wage) that secure some social stability. Tax credits, tax incentives, and tax exemptions are used toВ support business sectors or regional areas or toВ help establish new industries. For example, inВ the green energy business, less environmentally friendly fuels and fossil fuels are penalized. Regulations can elevate local standards inВ ways that leave foreign companies struggling toВ keep up or require huge expenses toВ realign. Others, especially those with wealth created byВ natural resources like oil, gas, and mining, have created sovereign wealth funds toВ 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 ofВ communism is its desire toВ control all business activity, down toВ individual small businesses. State capitalism instead wants toВ control the major strategic sectors ofВ the economy and regulate some others. Instead, inВ 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 toВ allow business toВ flourish without interference.
Capital, the Real Economy, and Wealth Creation inВ 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 ofВ liberal capitalism is that it is not aligned with the needs and strategic direction ofВ aВ country: private businesses just chase profit or money accumulation. Usually inВ liberal capitalism, this is obviated byВ legislation and taxation toВ encourage private businesses toВ invest and enter aВ specific market segment. This investment is rarely encouraged toВ effectively meet aВ need, but more for declaring success byВ showing off highly questionable GDP numbers. InВ capitalism, money, like water, flows where there is less resistance and gives higher returns. So investors prefer toВ invest inВ fast food or coffee chains instead ofВ inВ 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 toВ the country, its people, and the wider local community. More refined forms ofВ state capitalism as practiced inВ the Sovereign Economic Model are comparable toВ the management ofВ water resources, such as riverbeds, basins, and coasts. Water, like money, must be directed inВ ways that create not disasters, but benefits toВ the local community.
State Capitalism 3.0В is the latest upgrade and current version. At the present moment, it is viewed as the third version after two iterations inВ the 19th and the 20th centuries. Currently, it is practiced toВ 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.
