Nationalization (20TH CENTURY)

The process by which privately-owned industries or companies are taken over by the state.

Nationalization is often applied to monopolies such as water and gas utilities or transport services, in which social needs are deemed more important than profitability.

Since the 1980s, there has been a trend to de-nationalize (privatize) industries in Europe, particularly in the UK.

Also see: privatization, laissez-faire, physiocracy, mercantilism

Source:
S Holland, ed., The State as Entrepreneur (London, 1972)

Compensation

Since nationalized industries are state owned, the government is responsible for meeting any debts. The nationalized industries do not normally borrow from the domestic market other than for short-term borrowing. If they are profitable, the profit is often used to finance other state services, such as social programs and government research, which can help lower the tax burden.

The traditional Western stance on compensation was expressed by United States Secretary of State Cordell Hull during the Mexican nationalization of the petroleum industry in 1938, saying that compensation should be “prompt, effective and adequate”. According to this view, the nationalizing state is obligated under international law to pay the deprived party the full value of the property taken.

The opposing position has been taken mainly by developing countries, claiming that the question of compensation should be left entirely up to the sovereign state, in line with the Calvo Doctrine.

Socialist states have held that no compensation is due, based on the view that private ownership over socialized assets is illegitimate, exploitative, or a hindrance to further economic development.

In 1962, the United Nations General Assembly adopted Resolution 1803, “Permanent Sovereignty over National Resources”, which states that in the event of nationalization, the owner “shall be paid appropriate compensation in accordance with international law”. In doing so, the UN rejected the traditional Calvo-doctrinal view and the Communist view. The term “appropriate compensation” represents a compromise between the traditional views, taking into account the need of developing countries to pursue reform, even without the ability to pay full compensation, and the Western concern for the protection of private property.

In the United States, the Fifth Amendment requires just compensation if private property is taken for public use.

Political support


In the
United Kingdom after the Second World War, nationalization gained support by the Labour party and some social democratic parties throughout Western Europe. Although sometimes undertaken as part of a strategy to build socialism, more commonly nationalization was also undertaken and used to protect and develop industries perceived as being vital to the nation’s competitiveness (such as aerospace and shipbuilding), or to protect jobs in certain industries.Nationalization was one of the major mechanisms advocated by reformist socialists and social democrats for gradually transitioning to socialism. In this context, the goals of nationalization were to dispossess large capitalists, redirect the profits of industry to the public purse, and establish some form of workers’ self-management as a precursor to the establishment of a socialist economic system.[4]

A re-nationalization occurs when state-owned assets are privatized and later nationalized again, often when a different political party or faction is in power. A re-nationalization process may also be called “reverse privatization”. Nationalization has been used to refer to either direct state-ownership and management of an enterprise or to a government acquiring a large controlling share of a publicly listed corporation.[citation needed]

According to research by Paasha Mahdavi, leaders who consider nationalization face a dilemma: “nationalize and reap immediate gains while risking future prosperity, or maintain private operations, thereby passing on revenue windfalls but securing long-term fiscal streams.”[5] He argues that leaders “nationalize extractive resources to extend the duration of their power” by using “this increased capital to secure political support.”[5]

Economic analysis

Nationalization can have positive and negative effects.[6] A 2018 Stanford study of Chinese firms found their State-owned enterprises (SOEs) to be significantly more productive.[7] In 2019 research based on studies from Greenwich University found that the nationalization of key services such as water, bus, railways and broadband could save £13bn every year. [8]

Conversely, an assessment from the Institute for Fiscal Studies found that it would add at least £150bn to the national debt and make it harder for the country to hit its climate change targets. This analysis was based on the assumption that the Government would have to pay the market rate for these industries.[9]

Expropriation

Expropriation is the seizure of private property by a public agency for a purpose deemed to be in the public interest. It may also be used as a penalty for criminal proceedings.[10] Unlike eminent domain, expropriation may also refer to the taking of private property by a private entity authorized by a government to take property in certain situations.

Due to political risks that are involved when countries engage in international business it is important to understand the expropriation risks and laws within each of the countries that business is conducted in order to understand the risks as an investor in that country.[11]

Marxist theory

The term appears as “expropriation of expropriators (ruling classes)” in Marxist theory, and also as the slogan “Loot the looters!” (“грабь награбленное”), which was very popular during the Russian October Revolution.[12] The term is also used to describe nationalization campaigns by communist states, such as dekulakization and collectivization in the USSR.[13]

The term expropriation is found by late Marx writings, specifically in “Karl Marx: A letter to Otechestvenye Zapiski” to describe the process of turning agrarian/rural peasants into wage laborers/proletarians if the Russian country is to become a capitalist nation like that of the Western European nations.

Nikolai Bukharin had criticised the term ‘nationalisation’, preferring the term ‘statisation’ instead.[14]

Examples

Another example is the expropriation of Granahorrar Bank owned by Julio Carrizosa Mutis in Colombia in 1998 as part of the economic plan performed by the Colombian government to mitigate the financial crisis. In the late 90s, the Central Bank tried to reduce liquidity caused by the financial crisis and Granahorrar, which was at the time one of the highest rated financial institutions, suffered liquidity distress caused from the government’s decisions.[15] As a result, the bank was expropriated without compensation and sold, on October 31, 2005, to the Spanish Bank BBVA.

In Venezuela, the massive expropriation plan that started in 2007, allowed to expropriate thousands of companies (from all strategic sectors) and land (arguing that those that were unproductive should be used to promote “food security and sovereignty”).[16] Expropriation and nationalization was one of the characteristics of the government of Venezuelan ex-President Hugo Chávez and President Nicolás Maduro. The result has been negative consequences in the economic sector

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