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.
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