Several types ofВ 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 ofВ state capitalism exists and there is no formula toВ define which is best or even what works. The best model toВ use is tailor-made for the country and brings the greatest benefits toВ its economy.
State-Owned Enterprises as Representatives ofВ State Capitalism
Many liberal countries, despite their self-acclaimed free markets and capitalism, own several state-owned enterprises (SOEs). Examples are Amtrak rail network inВ the US, banks inВ the UK, the alcohol monopoly inВ Sweden, and utilities inВ many countries. Germany even has aВ state-owned beer brewery. Further, many SOEs are owned byВ 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. InВ the first case, SOEs compete for the market share fairly, collaborating even with private businesses. InВ the second case, they compete aggressively and use government political power toВ introduce laws that benefit them, gain monopolistic positions, and push private business out ofВ 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.
InВ the final analysis, well-managed state-owned enterprises can provide aВ stable economy and can also create growth and prosperity no less efficiently and effectively than private businesses.
State Capitalism Investment Models
AВ sovereign country should primarily use its economic policies toВ create the right foundations for business. But it can also use various tools toВ fund its development. These tools can be funds, SOEs, or agencies.
Sovereign wealth funds are special funds accumulated byВ aВ country, usually byВ oil-rich nations inВ the Middle East, Norway, and Russia. InВ most cases these funds are simply intended toВ optimize returns, that is, toВ make the most efficient investments anywhere around the globe, and thus operate just like an investor. Sometimes they are mixed. InВ addition, they invest internally, meaning they finance business inВ their home country. For example, inВ Russia, the sovereign wealth fund RDIF invests and co-invests mainly internally. The most prominent example ofВ its investment is the Sputnik V vaccine for COVID-19.
SOEs have historically been tied toВ energy, i.e., oil and utilities, probably because these industries are critical toВ state budgets. While inВ the West these have been mostly or partly privatized, inВ many countries state-owned utilities are the norm. InВ developed countries, few state-owned companies exist, while inВ emerging countries they are common. As aВ paradox, historically, the biggest growth seems toВ have happened while the state had aВ larger ownership ofВ entire industries, both inВ Europe and inВ Asia.
The state itself, through its government, can influence business with economic policies, taxation, regulation, and permits. InВ fully deregulated capitalist countries, the government does not pose many obstacles toВ business. It even supports the largest companies. Usually the government has toВ step inВ if aВ critical business suffers significant losses or faces bankruptcy. However, inВ state capitalism, the state heavily regulates some sectors ofВ the economy, owns or controls extensive business, and effectively has aВ de facto monopoly on strategic industries.
State capitalism allows aВ country toВ move aВ huge amount ofВ resources toВ implement aВ plan. The state can move state-owned companies, sovereign funds, and internal funds toВ support an industry. This combination ofВ finance, labor, and technological skills makes it easier toВ complete large-scale projects. Imagine aВ railroad infrastructure upgrade: the state provides financing, aВ 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 ofВ the general economy. Infrastructure, employment, and internal development ofВ 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 toВ lift all boats, as it is more self-centered and the benefits are restricted toВ each individual company.
State capitalism is not aВ silver bullet for all sectors ofВ the economy. These are the areas where state capitalism can best be applied toВ 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 byВ the state because aВ telecom network is aВ fundamental part ofВ the infrastructure for the internet and data transmission. Here, state control ofВ the physical grid network is ofВ 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 ofВ the physical infrastructure. On the business side, they operate as virtual operators and take charge ofВ the service aspect for consumers.
The sovereign economy described inВ the Sovereign Economic Model also controls the food-distribution system and, consequently, the largest supermarket chains. Such food distribution networks are controlled byВ the state, but with the participation ofВ all food producers as shareholders and suppliers. InВ Sweden, alcohol is sold at the retail level only inВ government-owned retail chains. InВ other countries, like the UK, Italy, and Switzerland, many cooperatives are running supermarket chains.
On the whole, investment models inВ state capitalism can provide sound economic progress and inВ some cases are more dynamic than very large companies. InВ the best-case scenarios, they are the start ofВ an avalanche, as besides the initial state-backed investment vehicle, academia, SOEs, and even private companies can also get involved.
Control ofВ Assets: State vs. Private Property
One process aВ sovereign country must engage inВ is control ofВ the most strategic sectors ofВ the economy and systemic companies. Many companies are inВ private hands, so how can aВ state achieve control? AВ government has many levers, especially the legislature and law enforcement. AВ government may create laws toВ nationalize companies or toВ put so many sticks inВ the wheel that the business becomes less attractive toВ investors or even becomes unviable inВ private hands.
Re-nationalization or reverse privatization can be options for regaining lost assets. Where assets were privatized using illegal methods, such as bribes, aВ state can nationalize aВ business without compensation. InВ addition, gross negligence and tax avoidance or evasion are good reasons for aВ state toВ seize the business. Here, aВ state might pursue de-privatization byВ purchasing aВ controlling or golden share ofВ aВ company on the open market or through aВ direct acquisition. The owners are compensated or given incentives toВ cede control. If aВ company is struggling with financial debt, the company itself is sequestered byВ the government and nationalized or bought during bankruptcy proceedings.
Alienation byВ extreme measures or stealth are yet other methods. The previous two methods involved solid legal or business methods for the state toВ take control ofВ assets. However, sometimes the state may use all the tools available, even disputable ones, toВ take the asset. The pressure exerted byВ aВ government can lead toВ alienation ofВ the assets, inВ which the owner decides it is more convenient toВ cede control.
Tax investigations may be launched against the main shareholders, the business may be embargoed byВ government procurement, or other tools could be used toВ 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 ofВ communism or planned, hybrid, or liberal markets, inВ different formats and with different names. Communist state capitalism was mainly used toВ reach political goals ofВ full employment and production targets, disregarding the profits, losses, sales, need, and demand inВ the market for those products. There, the government carried out the plan, but inВ the long term the system was doomed toВ failure as the state wasted resources producing aВ lot ofВ unusable, unneeded, or unwanted goods.
InВ liberal markets, the government is neutral or subjugated toВ the business interests ofВ private companies. State corporations still exist as aВ legacy from the past. Most were established many decades ago. InВ 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. InВ times ofВ crisis, businesses and people ask for government intervention toВ 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 toВ control only the strategic industries ofВ aВ country, mainly finance, the military, energy, telecom, and natural resources. Industries, especially light industry and services, should be mostly unregulated byВ the state. Instead, they should be as competitive as possible toВ 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 ofВ the economy. It does so byВ 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 ofВ 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 aВ vintage model that still can work? Old 5-year plans are being revived from the communist past. InВ the Soviet Union, China, and other satellites, the economy was managed using 5-year plans. Are they truly so bad? Is aВ (partially) planned economy that bad? InВ non-market economies, they were highly inefficient. They mostly decided the output ofВ products from factories regardless ofВ 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 10В years toВ be produced and delivered, while other goods categories were available inВ surplus. InВ the past, such data had toВ be collected, recorded, and compiled manually, which was tedious and time-consuming. ByВ the time the data collection was completed, the facts on the ground were already different. It was almost impossible toВ monitor progress, but times are changing.
Currently, 5-year plans still have aВ bad reputation, but inВ fact many private companies and multinational corporations use aВ similar method with so-called strategic business plans for 3, 5, and 10В years. This method ofВ planning is better adapted and is close toВ the market conditions studied byВ external consultants and internal market research. Nowadays, such plans are run with software, AI and Big Data. It is believed that aВ country with aВ sovereign economy should continue toВ use 5-year plans toВ plan and drive both political and economic forces inВ the right direction. This gives the country aВ straight path toВ certain goals and objectives. Therefore, financial planners can offer investors safe investment options. More so than inВ 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 toВ standards applied toВ the rest ofВ the economy. They are often specific toВ some business sectors such as high tech, pharma, IT, and start-ups and are strongly oriented toВ welcome international collaboration and industries with robust growth potential. Moreover, they are touted as islands ofВ 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.
AВ government has aВ more precise overview ofВ an economy than aВ single business or industry, so it is able toВ direct and distribute efforts and resources where they are more beneficial for the whole industry. InВ the same way, aВ highly diversified conglomerate corporation must coordinate different businesses internally toВ get the best financial results for the conglomerate as aВ whole.
The Putin Doctrine: 51В Percent State Ownership, 49В Percent toВ Investors
Russian President Putin has implemented one ofВ the most clever state capitalism ownership structures. Partial privatization lets the state control most ofВ the shares while ceding 49В percent ofВ them toВ investors. Such aВ structure applies toВ several ofВ 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 aВ de facto public-private partnership inВ running business operations, is probably one ofВ the most efficient economic models for anВ 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 ofВ infrastructure is almost impossible from aВ financial point ofВ view. So the base infrastructure, such as the electric grid and gas and water networks should belong toВ the state. Market actors can provide aВ variety ofВ connectivity services as well as last-mile sales and services toВ end consumers. Utilities are massive companies with billions inВ revenue and can often generate large profits. They additionally require significant investment for upkeep and new infrastructure. They require underlying technologies with medium toВ 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 ofВ cheap economic activity. Therefore, all businesses inВ the energy market sector should belong toВ the state. The rationale is toВ provide the population and business with the best mix ofВ energy at convenient prices. Energy business should limit profit-taking toВ pass on savings toВ 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 inВ mining, oil and gas extraction, transport, storage, power generation, and renewable energy technologies toВ add more R&D and innovation. Otherwise, only investments toВ build additional capacity and power stations toВ sell excess energy toВ foreign countries are alternative options.
The concept for the telecom sector should be identical. At least 51В percent ofВ the physical infrastructure network should belong toВ the state, with market actors owning the rest. InВ 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 toВ manage costs and integration more accurately. The ownership ofВ telecom companies can therefore be useful for building domestic technologies and toВ supply them with 4G or 5G equipment. That would start aВ new industry with aВ high level ofВ value creation and manufacturing ofВ medium-to-high-tech communication equipment and devices.
Banks are the foundation ofВ all transactions for an economy. Payments are made via bank accounts ofВ commercial entities while connected mostly via cards and payment systems between two parties inВ consumer transactions. AВ sovereign country should not only control the money via its Central Bank and regulators, but also have aВ significant stake inВ the system for stricter direct control. For systemic banks, the government should have the majority ofВ shares or at least aВ golden share toВ veto some business practices. Payment systems, as inВ cards or other mechanisms, should likewise be under firm government control. InВ the best-case scenario, they should be local implementations instead ofВ belonging toВ private hands or foreign corporations.
Media is not part ofВ the business infrastructure per se, but is more ofВ aВ government loudspeaker on the economy itself. So aВ government should have control ofВ its media directly byВ ownership or regulation, or media should be aВ government-aligned business.
Transport and logistics are an important part ofВ the business infrastructure because they move people and goods. Ports, railways, and airports are key facilities. As an economic sector inВ its own right, transport and logistics can give aВ boost toВ these infrastructure investments. This can foster industrial development ofВ machinery, equipment, and industrial tools for various industries, from vehicles toВ tools and machines. Transport and logistics offer aВ high potential for automation and optimization byВ applying many technologies such as robotics, AI, and Big Data.
Any monopoly or rent-seeking business, if it is an unavoidable component ofВ national economic development, should belong toВ the state. Then the state can run it as aВ state-owned enterprise and balance profits and services at the lowest cost possible for the population. That is the mindset inВ Europe for the health care industry, inВ which most essential services are free or cost only aВ symbolic fee. Alternatively, the state uses profits from monopoly state-owned corporations toВ provide free or subsidized services toВ society.
Specifically, control over all or most ofВ the mentioned industries allows aВ government toВ further condition much ofВ the economy and retain aВ big part ofВ economic sovereignty. This gives it the strength required toВ impose additional economic policies beneficial toВ the country and its citizens. Despite state control ofВ the business infrastructure, long-term well-defined strategic plans can also help private business toВ co-invest and build large value-added services on top ofВ these industries.
Finance
