Nationalization

Nationalization is the taking into public ownership on a centralized basis of previously privately or municipally-owned industries and utilities. Fuel and power utilities and transport and communication industries commonly feature among lists of nationalized industries, both because the state has a direct interest in the pricing and availability of their output, and also because it is often the state which provides or underwrites the capital for their early development. Both the need to construct networks, whether in railways, telecommunications, or electricity, and the fact that the network forms a natural monopoly, require at the very least its regulation and, commonly during the twentieth century, its nationalization. Although these network industries form the mainstay of nationalized industries, nationalization also occurs in the manufacturing and extractive sections of industry. In manufacturing, such transfers of assets into public ownership are often politically motivated, as for example in the post–World War II nationalization of the Renault company in France because of alleged wartime collaboration with Nazi Germany. Where financial institutions are held not to be lending "in the national interest" they too are vulnerable to nationalization, whether in France or India.

In extraction, governments may nationalize a "natural resource" industry in the light of perceived exploitation of those national riches. In the Middle East the appropriation of oil refineries was both a retrospective payment for past exploitation and a means towards obtaining a greater share of rents on oil extraction. Professions that such resources were nationalized in order to control their rate of depletion should be viewed with some skepticism. In Asia, Africa, and Latin America, there were few nationalizations before 1962, although some that did occur in the oil industry, such as Iran's appropriation of the Anglo-Iranian Oil Company's (AIOC's) assets in Iran in 1951 and Egypt's closure of the Suez Canal in 1956, provoked international crises. Similarly, Guatemala's nationalization of United Fruit's holdings in 1953, newly-independent Guinea's seizure of all French holdings in 1959, and the Cuban expropriation of U.S. property in 1959 and 1960 provoked serious disputes with the major powers affected. Despite this, nationalization, particularly when part of a process of de-colonization, can run comparatively smoothly. In 1946, Juan Domingo Perón (1895–1974) bought out the British-owned Argentine railroads on generous terms, and in the 1950s Burma, India, and Indonesia took over British-and Dutch-owned property with little conflict.

From the late 1960s there was a marked increase in the rate at which foreign-owned concerns were nationalized in Asia, Africa, and Latin America, with the governments of Chile, Peru, Bolivia, Ecuador, and Venezuela all showing a particular penchant for transferring natural resource (copper, oil, nitrates) operations into public ownership. Commonly accompanying the economic reasons adduced for such nationalizations were the social ambitions of income and wealth redistribution and the improvement of the skills and possibilities of the domestic labor force. In Zambia in 1969, after the copper-mining companies had been "invited" to offer 51 percent of their equity to the state, the government embarked on a program of "Zambianization" designed to mitigate pronounced racial inequalities in Zambian society by replacing non-Zambians with Zambians in positions of skill and responsibility.

A frequent corollary of nationalization is the restructuring of the affected industry into monopoly form. This, combined with the fact of public ownership, creates problems concerning appropriate pricing and investment practices. Whether the industry is nationalized or privately-owned but regulated (as with utilities in the United States), these problems have attracted considerable attention from economists. In part, the problem arises from the economists' wish to price at marginal cost, and the presence in these industries of sizeable fixed and sunk investments. This juxtaposition of high capital costs and low operating (marginal) costs can create in industries such as electricity and telecommunications both budgetary problems in terms of breaking even and political problems, as allegations of loss-making or profiteering are thrown at these public monopolies. Also to be factored into this problem of political economy is the financing of any extension of the network, because the implicit use of cross-subsidies within the industry offends economists'—but not politicians'—concern with efficient resource allocation. Steadily, state-owned industries have moved closer towards the economists' prescription of marginal cost pricing and the application of test discount rates to investment projects, but progress is variable and partial.

Nationalization often comes in postwar waves. It is no coincidence that the Russian Revolution of 1917 and the Chinese Communists' defeat of the Nationalists in 1949 occurred respectively during World War I and in the wake of World War II. In both countries the collectivization of agriculture was followed by the nationalization of major industries. Even in capitalist economies, war almost invariably involves greater direct government involvement in the functioning of the economy, and whether it follows defeat or victory, that involvement can provoke dissatisfaction with existing arrangements and/or demands for greater "fairness" in the distribution and pricing of output. On this basis, the coal, gas, railway, and electricity industries were nationalized in France and the United Kingdom following the ending of World War II. The technological constraints imposed by the fixed network meant that, except in the case of coal, the output of these industries was not tradeable, and therefore neither subject nor amenable to reprisals. In the case of coal, a government's decision to nationalize the domestic industry ought not to provide grounds for reprisals in other countries, although a government's subsequent decision to restrict coal import and exports may. The imposition of formal price controls or cost-based pricing on the nationalized coal industry has the effect of reducing imports while increasing domestic demand. Wartime rationing schemes may have to be continued until long after the war (in the United Kingdom, until 1958 in fact) while exports are denied to a coal-starved Europe. As economists have long remarked, it is not so much the issue of ownership (public or private) as the structure (monopoly or competitive) and the behavior (pricing, investment) of the industry, which is important.

Where reprisals might occur is where foreign-owned assets are seized by national governments. Following the seizure of the AIOC's assets in Iran in 1951, Britain imposed a worldwide embargo on the purchase of Iranian oil. Yet, the impact of such tactics is always likely to be limited. In a tradeable item such as oil, short of a physical blockade of ports and pipelines, it is difficult to monitor the behavior of even the signatories to any embargo agreement. More pertinently, in emphasizing the political aspect to the nationalization of oil, it also foreshad-owed the boost which OPEC would receive from the Arab-Israeli conflicts of the 1970s. In short, where effected for sound economic reasons, usually in the presence of a natural monopoly network, then nationalization is simply the choice of a form of regulation. When that decision is almost automatically followed by a decision to extend the monopoly beyond the natural monopoly boundaries to include, as in electricity, the generating and distributing sections of the industry, then an illogical but common association is established between the transfer of ownership and the restructuring of the industry. It is from the monopoly structure of these industries that most of the economic and political problems of these industries have flowed. Although instances do exist of governments nationalizing foreign-owned assets, overwhelmingly, nationalization concerns domestic industries and utilities whose scope for international trade is highly restricted. As an idea, nationalization reflected the mood of its time, a suspicion of market mechanisms, and optimism in the capabilities of government. Such ideas have become tarnished, and the successive processes of denationalization and privatization marked the move from an initial expression of dissatisfaction with public ownership to a naïve trumpeting of the redis-covered benefits of private ownership. All too often the political interest in transferring ownership trumped the economic concern with breaking up the nationalized monopolies into their contestable and noncontestable sections. Nevertheless, the idea of privatization was one of Britain's leading exports during the 1980s, and its dissemination roughly coincided with fundamental political and economic changes in communist economies. In both the U.S.S.R. and China, the privatization of state-owned enterprises in the mid-1990s followed a pattern similar to that of agricultural reform in the late 1970s. As early as 1978, China had already begun to experiment with moves from a collective-farming system to one based on contracts between households and local governments. Yet, whereas China's process of privatization was pragmatic and monitored by a strong central state, in Russia the process raised serious questions concerning the state's ability and willingness to protect and respect property rights. Ironically, in respect to nationalization and privatization, what some see as the forcible transfer by the state of assets between public and private ownership relied for its success on the coexistence of an agreed and enforceable set of property rights and laws.

SEE ALSO Arms, Armaments; Banking; Boycott; British-American Tobacco; Burma; Chile; China; Coal; Cuba; France; Germany;Hong Kong and Shanghai Bank; Imperialism; India; International Monetary Fund (IMF); Iron and Steel;Mexico;Nanyang Brothers Tobacco;Nationalism;PEMEX;Peru;Russia;United Fruit Company;United Kingdom;United States;Venezuela;World Bank.

BIBLIOGRAPHY

Chick, Martin. Industrial Policy in Britain, 1945–1951. Cambridge, U.K.: Cambridge University Press, 1998.

Daniel, Paul. Africanisation, Nationalisation, and Inequality: Mining Labour and the Copperbelt in Zambian Development. Cambridge, U.K.: Cambridge University Press, 1979.

Lipson, Charles. Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries. Berkeley and Los Angeles: University of California Press, 1985.

Roland, Gérard. Transition and Economics: Politics, Markets, and Firms. Cambridge: Massachusetts Institute of Technology Press, 2000.

Sigmund, Paul E. Multinationals in Latin America: The Politics of Nationalization. Madison: University of Wisconsin Press, 1980.

Toninelli, Pier Angelo. The Rise and Fall of State-Owned Enterprises in the Western World. Cambridge, U.K.: Cambridge University Press, 2000.

Martin Chick