The Sovereign Economic Model. A manifesto for rising nations. Stefan Demetz

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      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resistance and lowest cost rather than using the latest technologies or production methods, so in time they become outdated and lose out to competitors.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 СКАЧАТЬ