The Sovereign Economic Model. A manifesto for rising nations
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 all 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.
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.
WTO and trade agreements. 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.
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.
IMF, World Bank, and other international institutions. 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.
Measurements of economic sovereignty. The economic sovereignty of a country is measured using different indicators:
• 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.
Economic colonialism for developing and emerging markets. 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:
• 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:
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 of production a worker can output. This increase is called productivity.
2. Raw resources, 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.
3. Capital 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.
4. Knowledge 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.
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.