In most countries, at least some commercial activities are carried on by organizations whose ownership and control vest in governments or bodies established by governments rather than in private individuals or groups. The reason for this may be simply one of political philosophy. Thus, for those who accept a Marxist labor theory of value, private ownership of capital and the unearned income flowing from it represent the essential evils of the capitalist system, and public ownership and operation of such capital become political ends in themselves. But the political support for nationalization is not restricted to Marxists. It also influences the thinking of other “democratic” socialists: the British Labour party, for example, is still committed in principle, in 1965, to the nationalization of the means of production, distribution, and exchange. Such attitudes are influenced, for example, by belief that private capitalism is immoral in its appeal to competitive and acquisitive motives or by dislike of the power of some men over others that private ownership of property is believed to confer.
At the same time, outside the communist countries there is continuing disagreement among socialists as to whether nationalization is an end of democratic socialism in itself or simply a possible means to the attainment of other economic and social goals. Certainly, in countries in which such groups have enjoyed political power, nationalization measures have been pragmatic in character and have been restricted to industries considered especially suitable for nationalization for reasons of history or of economic efficiency. This article will be confined to nationalization in the context of these “mixed” economies and to the questions of economic efficiency, broadly defined, that affect nationalized industries in such conditions. This should not be taken to mean, of course, that I would believe it possible to explain the existing scope and character of public enterprises in any country at any time solely by reference to economic criteria. On the one hand, public enterprises of economic importance exist in countries, such as the United States, in which nationalization as a political dogma is of trivial influence. On the other, the extent and character of the deliberate acts of nationalization in countries such as Britain have clearly been influenced by motives other than the search for an efficient use of productive resources. But whatever the historical reasons for the existence of nationalized industries, they have to face a common set of economic problems, and it is toward these that attention will be directed.
Equally, I shall exclude from discussion the wide variety of other forms of public ownership or intervention which are also to be found in most countries. These range from municipal commercial activities to the share-participation of governments or their agents in firms or industries which remain in principle private. Many of these other activities of governments share common characteristics with nationalized industries, but they also differ in ways that make it desirable to set them aside in order to concentrate attention upon the nationalized enterprises proper, that is, upon the quasi-independent corporations set up by central governments to indulge in specified commercial activities with the help of physical capital which has no private owners.
Efficiency in resource allocation . Let us begin from the admittedly oversimple notion that the sole objective of nationalized industries is the furtherance of an efficient use of community resources, and let us simplify our problem further by assuming that the nationalized industry is operating in an economy in which general conditions of competion prevail in the private sector. If the nationalized industries being considered have appropriate technical characteristics, it might seem that the postulated objective of “ideal resource allocation” could be achieved simply by instructing the managers of the producing units within nationalized enterprises likewise to compete one with another—and with private industry. But even in this greatly simplified world, certain interesting problems arise.
Such a solution would require that the producing units of nationalized enterprises should endeavor to maximize their net returns, and that in doing so they should finance their investment programs either from their own resources or from revenues raised by competitive borrowing in the private capital market. That is, the activities of nationalized undertakings would be subjected to the same market tests that are applied to a private corporation. But this carries with it the implication that the riskiness of investment should be unaffected by the nature of resource ownership, and it is not easy to see how this can be achieved. If public ownership is believed to imply an ultimate obligation for the government to meet the liabilities of the enterprise, and it is clear that such a view is usual, then this fact must reduce the risks of those who lend to that enterprise and hence must enable it to borrow on terms more favorable than those available to private producers. Equally, it is necessary that ventures of similar inherent riskiness should earn a similar rate of return, whether they are public or private in nature.
A genuinely competitive situation, then, would seem to require both that there be no inhibitions upon the directions in which the activities of the nationalized industries might develop (since if their scope is regulated, the producing units may be precluded from implementing plans they believe likely to be profitable), and that they be explicitly subjected to exactly the same kinds of bankruptcy procedures and other financial constraints as enterprises of other kinds. Were such a solution to be adopted, assuming it to be possible, the size and character of the nationalized sector would effectively come to be determined by the play of market forces, and it is then not obvious what economic purpose the deliberate creation of nationalized enterprises could serve.
Departures from this idealized world arise for several reasons. First, those who find nationalization politically appealing are unlikely to agree that its extent and functions should be decided solely by the competitive criteria just set out. Second, there may be specific reasons why competition is considered contrary to the public interest. For example, the frequent operation of civil airlines as nationalized undertakings is clearly related in part to strategic considerations and to a related distrust of international competition. Third, there are arguments, usually imprecise, that economic power is properly vested in government, for example, that it should control the “commanding heights” of the economy, and that nationalization contributes to this. Fourth, there is a set of specifically economic arguments, ranging from the need to deal with private monopoly to questions of employer-employee relations.
In what follows, we shall make the realistic assumption that the idealized conditions of competition provide a useful bench mark against which to judge actual policies but that once nationalized industries exist, they are seldom if ever going to be able (or permitted) to use thoroughgoing competition as a solution to their investment, price, and output decisions. (It does not, of course, follow that they themselves must be protected against competition from elsewhere.) Consequently, economic policy must take account of the fact that nationalized industries are likely to enjoy varying but sometimes significant degrees of monopoly power, and that means other than competition have to be found to promote efficient resource use in the special conditions of nationalization. The next section deals with monopoly. Subsequent sections deal with other economic problems in four distinguishable but closely related groups: pricing policy, stability and growth, labor relations, and denationalization.
Nationalization and monopoly . The resource allocation problem does not disappear if the simple competitive solution to it is rejected: some other set of behavior rules (administrative procedures) has to be devised to guide the output, price, and investment decisions of nationalized enterprises. Public monopoly brings its own problems of resource allocation and of economic power; this remains true even if one purpose of nationalization is to destroy private monopoly power. Indeed, there are some respects in which the monopoly power of a nationalized industry must be greater than that of any private group. For private monopoly power is separated from and opposed to the political powers of government, and these latter powers provide means of legislative and other control. The counterpart of the “commanding heights” argument earlier mentioned is the fact that nationalization places political and economic power in the same hands: there is no lack of instances, for example, of governments using legislative or fiscal measures to protect nationalized industries from developing competition.
On the other hand, if public enterprises are not required simply to pursue profit, then it is argued by advocates of nationalization that the absence of the motive of personal gain makes it possible for administrators to behave “responsibly” in a way that cannot be expected of a private monopolist. Insofar as the policies of nationalized industries are politically controlled, the weight given to this proposition will depend upon the degree to which it is accepted that political motivations are likely to be more “responsible” in some sense than economic ones. Also for this type of proposition to have operational (policy) relevance, it must be possible to specify the characteristics of “responsible” behavior in an unambiguous and agreed fashion, so that they can be embodied in administrative rules and procedures (“guidelines”). This is not a trivial problem: its resolution must incorporate not only a statement of principle as to how a “responsible” monopolist should behave but also the provision of agreed answers to all the problems that will be discussed in subsequent sections. In fact, since World War n this notion of public responsibility has encouraged a particular interest in the control of nationalized industries among students of public administration. In Britain, for example, writers have been much concerned to relate the (admittedly vague) specifications of the enabling acts of Parliament to administrative structures and guiding principles. In consequence, the economic purposes for which the industries apparently exist have become overshadowed by procedural debate concerned with implementation of an incompletely specified public interest. It was, indeed, only in 1961, with the publication of a White Paper—The Financial and Economic Obligations of the Nationalised Industries (Great Britain... 1961) that a British government attempted to lay down general policy guidelines explicitly related to economic purpose.
Pricing policy . The most obvious difficulty that arises if a “fully competitive solution” cannot be (or is not) adopted is that of producing satisfactory rules for the pricing of nationalized industry products. Even if it were possible to find criteria by which a “proper” return on investment could be determined, there would remain the difficulty that monopoly power makes it possible for a nationalized enterprise to increase its earnings simply by raising prices or by such devices as discriminatory pricing—devices which would be precluded by the existence of competitive conditions and which cannot generally be expected to improve resource allocation in the community at large. To some extent, this is a problem that might be dealt with by general directives as to what types of pricing policy are permissible and by subjecting nationalized industries to the same antimonopoly policies as the rest of industry. But there remain some awkward problems of implementation. In the first place, it is frequently difficult to establish whether the charging of different prices (for example, by use of multipart rate structures in such industries as electricity or telephone service) is evidence of monopolistic discrimination or of variations in the differential cost of supplying different consumers. In the second place, it is in the nature of things that different nationalized industries enjoy different degrees both of monopoly power and of potential profitability, and this makes it difficult to apply the same general rules to all of them in a fashion that will conduce to economic efficiency.
Again, nationalized industries are frequently multiproduct firms, and both the costs of providing the different products and the demands for them may be interrelated. This is of course a problem that is not unknown in private industry, nor is its existence incompatible in principle with efficient resource use. But the circumstances in which policies such as cross-subsidization are an efficient means of dealing with the problem are difficult enough to establish in principle, much less to express in general rules covering the whole range of nationalized industries. What we can be clear about is that rules that ignored cross-subsidization and rules that forbade it (assuming that practicable rules could be formulated) would both be contrary to purpose.
Yet another aspect of the pricing problem concerns the “public utility” aspect of nationalized industries. If the conditions of production are such that only a few technically efficient producing units are needed to satisfy market demand, then it can be argued that a different criterion of pricing from that appropriate to competitive conditions may be called for. Specifically, indivisibilities in the production process may result in its being possible to increase output at an incremental cost that is less than the average cost of producing the industry’s output as a whole. Thus, it is argued, a choice has to be made between pricing at average cost, which denies access to the product to some potential consumers who would be willing to pay a price which would cover the incremental costs of increased output, and pricing at marginal (incremental) cost, in which case such consumers would be supplied but total receipts from sales would be less than enough to meet all necessary costs of production, so that the industry would have to be subsidized. The complexity of the problem is increased by the fact that, in such conditions of indivisibility, it is also conceptually possible for marginal cost to be greater than average cost. There is a considerable and continuing literature concerned with this problem (see E. H. Phelps Brown & Wiseman 1953).
In my view, however, this aspect is of greater interest as an intellectual exercise than as a practical guide to nationalized industry pricing policy, for two reasons. First, there are very few industries, if any, in which technical conditions of themselves preclude the existence of enough production units for competition to be at least a conceptual possibility. Second, the case for marginal cost pricing is analytically suspect. All production processes involve temporal and technical indivisibility of some kind: the arguments for the application of special rules to “public utilities” rests upon an essentially arbitrary decision that the opportunity costs of the use of some specially durable assets should be ignored. Also (and as a corollary of this), acceptance of the need to subsidize must involve a value judgment that the real incomes of consumers of nationalized industry products are properly increased by redistribution from the taxpayers. In practice, these difficulties have meant that, even in those rare cases where a marginal cost pricing rule is said to be adopted (for example, the pricing of electricity in France), the actual procedure rests upon essentially arbitrary solutions to the problems described.
Finally, it is commonly argued that, while nationalized industries may serve directly “commercial” purposes, they also confer other, indirect social benefits upon the community which private producers would fail to take into account (because such benefits produce no profit) but which can influence the policy decisions of a nationalized corporation. Recent writings have demonstrated, in my view conclusively, that these external benefits (“spillovers”) have effects upon resource use and income distribution in the community at large that are not to be predicted a priori, that they are intimately related to such matters as the nature of property rights, and that their existence is unlikely to be confined to nationalized industries. Nevertheless, it is of interest to postulate as a simplification that such externalities exist solely in the case of nationalized industries and to ask what policy conclusions would follow. It is useful to distinguish general and specific benefits. Logically, general social benefits (deriving from the very existence of the enterprise) would justify the global subsidization of the nationalized industry per se. It is not easy, however, to think of benefits of this kind, much less to quantify them. Most of the illustrations commonly given turn out on examination to be specific in character. For example, the “strategic” argument for the subsidization of a whole railroad system cannot be examined rationally without specification of the particular strategic objectives (for example, the character and timing of the relevant hostilities) to which policy has to be related, But once this has been done, it is at least conceptually possible to identify those parts of the system which have strategic value, and it is to these alone that subsidization should be directed. In fact, little has yet been done by those who utilize this type of argument to identify and measure the benefits in question, and no country requires nationalized industries to attempt to quantify them for such purposes as the setting of “target” rates of return on capital.
Investment criteria, stability, and growth . The discussion so far has taken no account of the fact that nationalized industries, like others, must make new investments and that a decision has to be taken as to what rate of return they should expect to earn on such investments. [SeeInvestment,article onthe investment decision.] Equally, the pricing problem must incorporate some notion of the opportunity costs of the existing physical assets of a nationalized industry (this is the public utility pricing problem again, but seen from another viewpoint), and, in cases where the industry has come into being by the purchase of the rights of private shareholders, regard also must be given to the financial compensation burden that should properly be borne by the nationalized industry.
Ideally, the investment guidelines would have to take account not only of the problems discussed in the last section but also of differing degrees of investment risk in different nationalized industries. Additionally, new investment, existing assets, and financial obligations all raise different questions and can be argued to call for different criteria. In the event, no intellectually satisfying “rules” that are also operationally practicable have been put forward. The most explicit attempt to deal with the problems is perhaps the British one already referred to (Great Britain... 1961). Effectively, this cites the “average” return to private industrial investment as a conceptual bench mark. But divergences are accepted for the kinds of reasons that we have examined in relation to pricing policy, and the rate-of-return “targets” of the individual industries are in fact decided each in the light of its own circumstances and subject to the need for ministerial agreement to substantial price changes.
There are manifest dangers in this type of procedure, for example, in the opportunities it provides for the subsidization of unprofitable ventures and in the scope it gives for political maneuver. But there are also some advantages, particularly in comparison with vague directives to cover costs “taking one year with another.” In particular, the procedure does encourage informed comment and comparison: the application of different criteria to British gas and electricity enterprises, for example, has attracted critical attention. Nor would it be universally agreed that the procedure must produce investment decisions manifestly less efficient than those taken in the private sector. Real world investment decisions (and particularly those of large corporations), it is argued, are taken in a fashion that fits uneasily with the notion of ideal resource allocation through informed competition.
Associated problems, to which no entirely satisfactory solutions have been found, concern the degree to which the enterprises should be expected to be self-financing (a decision which has a clear affinity with the pricing problems of the last section) and the imperfection of the capital market if the nationalized industries form a significant proportion of the total demand for new borrowing.
The investment policies of nationalized industries have also attracted attention from another viewpoint. The new theories of income and employment developed after 1936 encouraged support for nationalization measures, it being argued that public investment programs could be varied to counter fluctuations in the general level of community income and employment [SeeIncome and employment theory]. Since then, increasing analytical sophistication has combined with increasing awareness of the practical difficulties of such a policy (and its potential conflict with other objectives) to diminish interest in the idea. On the other hand, there is a growing interest in the role of public enterprise in generating growth in less developed countries. While no common or agreed ideas have yet emerged, some interesting approaches have already been developed. Greece provides an example. A distinction is made between infrastructure enterprises (for example, harbors and communications), whose technical characteristics appear to make public operation a practical necessity for the foreseeable future, and other nationalized enterprises, whose existence is necessitated, for example, by the lack of a developed domestic capital market, scarcity of entrepreneurship, or similar barriers to private initiative. [SeeCapital, social overhead.] The two groups require different policies. The first has to be regarded as a continuing public obligation, necessary for the stimulation and growth of other types of economic activity. The second can be treated as self-liquidating, in that the further development of the enterprises themselves, and with it of the whole economy, should make public operation unnecessary and permit them to be sold off to private capitalists. It remains to be seen whether growth is in fact encouraged by such policies and, if it is, whether it will be politically possible to shift the successful “commercial” enterprises from the public sector to the private sector.
Labor relations . Historically, workers’ support for nationalization is, of course, associated with political dogma and embraces a belief that it must make for better labor-employer relations. Experience provides no particular support for this view. True, the trade unions do not have to negotiate with private capitalists. But the policy makers (whether administrative heads or politicians) still have interests to serve and directives to obey that are wider than, and always in potential conflict with, the interests of organized labor. Also, the very nature of nationalized industry attracts publicity for disputes, and this at least must make employer-employee relations no easier.
Workers’ support also derives from a fear of technological unemployment: nationalization provides means not otherwise available of preventing or slowing the decline of industries adversely affected by technical change (such as the British coal and railway industries). For a community interested in economic growth, however, the workers’ direct interest may seem here to be in conflict with the social interest. At the same time, the workers’ distrust of technical change derives from a recognition of the hardships it can impose upon individual workers. Thus the support for nationalization as a protection is comprehensible, though it provides a policy solution inferior in all major respects to income-deficiency supplements, retraining, or other measures framed to deal directly with the personal, social, and economic consequences of dynamic change. [For further discussion of labor relations under nationalization, seeLabor unions, article onlabor movements and collective bargaining in europe.]
Denationalization . If an industry is to be denationalized, there are difficulties to be solved in disposing of the relevant assets. These difficulties vary in importance with such things as the duration of the prior nationalization, the size of the industry and its constituent technical units, expected present and future profitability, likelihood of renationalization, and so on. But while there are questions of technical interest here, they are perhaps less fundamental than those concerned with the criteria by which denationalization might be deemed appropriate. This is a question that clearly involves political attitudes of the kind discussed at the beginning of this article. But it has received remarkably little attention, even within the context of agreed political aims. For example, there has been little satisfactory discussion of the criteria by which it might be decided, in an economy in which private ownership of capital is believed preferable (ceteris paribus), that industries earlier nationalized should automatically become eligible for denationalization.
The discussion should have sufficiently indicated that there are continuing differences about the political economy of nationalization that are perhaps unlikely to be resolved by reason, at least in our time. There are also important outstanding conceptual and analytical disagreements, such as those concerned with the internal logic and practical relevance of incremental (marginal cost) pricing. There is also scope for further technical study, particularly in the two important areas concerned with the further development and application of crosssubsidization ideas and with the evolution of procedures by which social benefits and costs can be more adequately specified, quantified, and explicitly incorporated into pricing and investment policy guidelines.
Brown, E. H. Phelps; and Wiseman, Jack (1953) 1963 A Course in Applied Economics. 2d ed. London: Pitman. → Sets out the arguments concerning public utility pricing and provides a further bibliography. See especially Chapters 3 and 5.
Coase, R. H. 1960 The Problem of Social Cost. Journal of Law and Economics 3:1-44.
Great Britain, Treasury 1961 The Financial and Economic Obligations of the Nationalised Industries. Papers by Command, Cmnd. 1337. London: H.M. Stationery Office.
Hanson, Albert H. (editor) 1963 Nationalization: A Book of Readings. London: Allen & Unwin. → Includes a commentary that is strongly favorable to nationalization on political grounds but treats the economic aspects only superficially.
Kelf-Cohen, Reuben (1958) 1961 Nationalisation in Britain: The End of a Dogma. 2d ed. New York: St. Martins; London: Macmillan. → A critique of the performance of British nationalized industries.
Lewis, Ben W. 1965 British Nationalization and American Private Enterprise: Some Parallels and Contrasts.American Economic Review 55, no. 2:50-64. → Deals with some of the economic problems referred to in the text. See also pages 75-85, “Discussion.”
Robson, William A. 1960 Nationalised Industry and Public Ownership. Univ. of Toronto Press. → An authoritative and sympathetic interpretation of recent British experience by a specialist in public administration.
Shepherd, William G. 1964 Cross-subsidizing and Allocation in Public Firms. Oxford Economic Papers New Series 16:132-160.
Wiseman, Jack 1963 Guidelines for Public Enterprise: A British Experiment. Southern Economic Journal 30:39-48. → A commentary on Great Britain, Treasury 1961 (Cmnd. 1337).
Goods and services can be provided by private or by publicly owned producers. Some, such as the postal service or defense, have historically, though not invariably, been provided by states. The concept of expropriating other forms of wealth or activity from private hands into common ownership began to appear in the eighteenth century. The idea that private ownership of land—then still the main source of wealth—vested both economic and political power in a narrow elite led the English radical Thomas Spence (1750–1814) to call for land to be owned by local parishes instead. This was, however, a form of municipalization, not nationalization. In the later nineteenth century calls for state ownership of land, as the most obvious of natural monopolies, were heard in socialist circles. Land nationalization also appealed as an apparent means of coping with the periodic bouts of unemployment experienced in maturing industrial societies. However, land’s diminishing economic importance and the rivalry of Henry George’s (1839–1897) concept of taxing land values ensured that this idea—notwithstanding continuing practice in communist societies—faded in western Europe and North America by the early twentieth century.
Meanwhile the idea of common ownership of other forms of economic capital or activity was gaining support. Earlier it had been assumed that competition was sufficient to secure the public interest. The high fixed costs of new utility industries, however, meant that in some places, such as Belgium, the very development of railways was from the beginning a state activity. In France private unwillingness to invest meant that the state built and maintained the rail network, while private companies ran the trains until the entire system was nationalized in the 1930s. Nationalization was thus a means of providing public goods when the market failed to do so. But it was not just in utilities that nationalization was felt to be beneficial. In a number of countries perceived market failure in investment also led to bank nationalizations in the twentieth century.
Nationalization could thus be seen either as a way of directing investment or of ensuring uniform provision of services. Some utilities were seen as natural monopolies, and nationalization was felt to be both more efficient and less susceptible to private rationing of services to maximize profits. Private telegraphy providers in Britain before nationalization in 1868, for instance, were accused of restricting services and charging excessive prices. It was also argued that competition was itself wasteful. Nationalization could rationalize assets to achieve economies of scale in the coal industry, for instance, that markets had failed to deliver. In other cases the decision was forced upon sometimes reluctant governments, as in the creation of the Canadian National Railways after World War I (1914–1918), when the government of Canada took over a variety of struggling companies in order to save the service from bankruptcy.
Nationalization was promoted as much for political as economic reasons. In Communist countries, the nationalization of a wide range of assets was seen as a way of controlling the means of production and securing a fairer distribution of social goods. Nationalization of some industries—notably the drink trade—was widely seen as desirable on moral or health grounds in the early twentieth century, and parts of this industry remain nationalized in Finland. And cultural nationalism was a key factor in the development of broadcasting along nationalized lines in interwar Europe. Similar considerations, as well as strategic communications, were to influence the development of European airlines as nationalized “flag carriers” in the middle years of the twentieth century. Security concerns have meanwhile led to the nationalization of a range of industries, from oil to the Transportation Security Administration in the United States in the wake of 9/11.
State control reached its greatest extent in Europe in the years following World War II (1939–1945). This did not stop angry reactions when European assets were taken over by third countries, as occurred, for instance, with the nationalization of the Suez Canal by Egypt in 1956. For Egypt, this was a way of accessing ready revenues for the state.
By the 1970s and 1980s, however, criticisms of nationalization were growing. The failure of state control in Communist systems to distribute goods efficiently was apparent. Evidence in the mixed economies of western Europe was more varied. A plethora of nationalized airlines undoubtedly contributed to overcapacity and inefficiency in that market. Political interference could, though it by no means invariably did, lead to overmanning or inappropriate investment by nationalized industries. More importantly at the popular level these industries could be portrayed as huge faceless organizations more responsive to their unions than to public demand. The rising cost of maintaining subsidies to nationalized industries by the 1980s also made states increasingly unwilling to shoulder this burden.
Privatization, popularized in Margaret Thatcher’s Britain in the 1980s, had two significant consequences. The rhetoric may have been about competition; in practice most of the privatized entities remained monopolistic. The result was the development of a network of regulatory authorities. Meanwhile financial liability for those industries has been transferred. So has the political pressure to use that control to, for instance, mop up unemployment by expanding the jobs available in the nationalized industries. Both the financial risk and the political opprobrium have been shifted to the private sector, while a degree of control has been maintained through regulation.
Some countries, like Britain, Germany, and various eastern European states, have undergone large-scale privatization; the process has been less marked in other countries, such as France. In some cases privatization has been reversed, not least in Vladimir Putin’s Russia, where the state has reacquired a number of assets in, for instance, the oil industry since 2000. Meanwhile in Latin America privatization has failed to fulfill expectations either in terms of economic growth or of poverty reduction. Instead, it was felt to leave major assets, such as the oil industry, largely in foreign hands. It is to tackle this, in the hope that it will prevent capital extraction in an increasingly globalized world economy, that nationalization has made a comeback as a political panacea since 2000 in Latin America.
SEE ALSO Communism; Dependency Theory; Monopoly; Nationalism and Nationality; Planning; Privatization; Public Goods; Railway Industry; Revolutions, Latin American; Socialism; State Enterprise; State, The; Washington Consensus
Foreman-Peck, James, and Robert Millward. 1994. Public and Private Ownership of British Industry, 1820–1990. Oxford: Oxford University Press.
Foster, Christopher D. 1992. Privatization, Public Ownership, and the Regulation of Natural Monopoly. Oxford: Blackwell.
Fournier, Leslie T. 1935. Railway Nationalization in Canada: The Problem of the Canadian National Railways. Toronto: Macmillan.
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.
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.
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.
nationalization, acquisition and operation by a country of business enterprises formerly owned and operated by private individuals or corporations. State or local authorities have traditionally taken private property for such public purposes as the construction of roads, dams, or public buildings. Known as the right of eminent domain, this process is usually accompanied by the payment of compensation. By contrast, the concept of nationalization is a 20th cent. development that differs from eminent domain in motive and degree; it is done for the purpose of social and economic equality and is usually, although not always, applied as a principle of communistic or socialistic theories of society. The Communist states of Eastern Europe nationalized all industry and agriculture in the period following World War II. Under the Labour government of the period 1945 to 1951, Great Britain nationalized a number of important industries, including coal, steel, and transportation. In non-Communist countries it has been common practice to compensate the owners of nationalized properties, at least in part; however, in the Communist countries, where private ownership is opposed in principle, there usually has not been such compensation. Nationalization of foreign properties has occurred, especially in developing nations, where there is resentment of foreign control of major industries. Instances include Mexico's seizure of oil properties owned by U.S. corporations (1938), Iran's nationalization of the Anglo-Iranian Oil Company (1951), the nationalization of the Suez Canal Company (1956) by Egypt, and Chile's nationalization of its foreign-owned copper-mining industry (1971). Such expropriations raise complex problems of international law. In some cases disputes over nationalization are settled by adjudication, with the expropriated parties obtaining compensation for their former properties, if only in part. In other instances, where no compensation is offered, severe strain in international relations may arise. The International Court of Justice ruled (1952) in the Anglo-Iranian Oil Company dispute that a concession made by a state to a foreign corporation is not an international agreement and is subject to the law of the conceding state—meaning that investors must assume the risk of nationalization in the country in which they invest, and developing nations have held that nationalization is a right implied by the UN Charter.
Privatization, the reverse process, has become widespread, however, with socialism's loss of credibility. Great Britain sold off many of its public companies, such as British Telecom; France sold 65 state-owned companies in 1988; and the collapse of Communist dictatorships in E Europe and the former Soviet Union has inspired large-scale privatization in some of the nations in that region, in some instances after distributing government shares to the public. Housing has also been privatized on a large scale in Britain, and privatization has been proposed for public housing in the United States. Developing nations, too, have begun to privatize. In the United States, the term has also been broadly applied to the contracting out of the management of public schools, prisons, airports, sanitation services, and a variety of other government-owned institutions, especially at the state and local levels.
See J. Margolis, ed., Public Economics (1969); G. L. Reid and K. Allen, Nationalized Industries (1970); T. Prosser, Nationalized Industries (1986); E. D. Sclar, You Don't Always Get What You Pay For (2000).
The Second World War gave further impetus to calls for public ownership; the succeeding Labour government followed its 1945 manifesto ‘Let Us Face the Future’ and nationalized the Bank of England, Cable & Wireless, coal (1946), inland transport, electricity (1947), gas (1948), and iron and steel (1949), generously compensating shareholders. Party-political strife over iron and steel (denationalized in 1953 but renationalized by Labour in 1967) scarcely detracted from the acceptance of Attlee's ‘mixed economy’ by the Conservatives. The latter even established the Atomic Energy Authority (1954) and nationalized Rolls-Royce, after it faced bankruptcy, in 1971. Further ‘lame-duck’ industries were nationalized by Labour in the 1970s, notably British Leyland (1975) and shipbuilding (1977). However, the Thatcher governments halted the process and began a ‘privatization’ programme in 1981; by 1996 the public sector of the economy had been virtually eliminated.