Home ›› 27 Jan 2023 ›› Editorial
Nationalization refers to the action of a government taking control of a company or an industry, which generally occurs without compensation for the loss of the net worth of the seized asset and potential income. The action may be the result of a nation’s attempt to consolidate power, resentment of foreign ownership of industries representing significant importance to local economies or to prop up failing industries In short nationalization means a process of taking privately owned companies, industries or assets and putting them under the control of the government. Nationalization happens in developing countries and can reflect a nation’s desire to control assets or to assert dominance over foreign owned industries.
Often, the companies or assets are taken over and little or no compensation is provided to the previous owners. Nationalization is different from privatization, in which government t run companies are moved into a private business. Privatization which is the transfer of government run operation into the private business sector. It occurs more frequently in developed countries. Nationalization has one of the primary risks for companies doing business in foreign countries due to the potential of having significant assets seized without compensation. His risk is magnified in countries with unstable political leadership and stagnant or contracting economies. The key outcome of nationalization is the redirection of revenue to the country’s government instead of private operators who may laundering funds with no benefits to the host country.
The oil industry has experienced nationalization actions for decades dating back to Mexico’s nationalization of the assets of foreign producers such as Royal Dutch and Standard Oil in 1938 and Iran’s nationalization of the assets of Anglo- Iranian company in1951. The result of Mexico’s nationalization of foreigners’ assets was the creation of PEMEX, which is one of the largest oil producers of the world. After nationalization of Anglo-Iranian, Iran’s economy fell into disarray and Britain was allowed back in as a 50 per cent partner. A few years later in 1954 Anglo- Iranian was renamed the British Petroleum company (BPC). In 2007, Venezuela nationalized Exxon Mobile’s Cerro Negro Project and other assets, seeking $16 billion in compensation. Exxon Mobil was awarded approximately 10% of that amount by a World Bank arbitration panel in 2014.
Nationalization can occur for many reasons like saving a struggling industry or an organization, economic profit for the government, a means to bring stability in a developing economy or as a way for progress or growth. There are three distinct types of nationalization; Capitalist, Reformist and Socialist.
Capitalist Reform:- In capitalist countries like US or Britain, there has always been some nationalization such as Post Office. There are sub-sectors of the municipalities-public ownership of tram ways, gas, electricity and water. For example, Demerar Railway Company was taken over by the Colonial government in 1921. Since the company was losing money, government came forward to rescue it. Monopoly is another example of nationalization when government took over the Rolls Royce Company to rescue the losing concern. To some it was a rescue of the capitalist class. Capitalist nationalization is not Socialism, rather it is State Capitalism. This was practiced in Germany during the regime of Hitler. The same format was applied during the regime of Mussolini in Italy. Capitalist monopolies reap huge profits by becoming government contractor. Capitalism has reached the stage of State Monopoly Capitalism.
Reformist Nationalization:-Reformist nationalization is like capitalist nationalization aids the Capitalist Class. This form of nationalization is carried out in a limited way and within the frame work of Capitalistic imperialism. The example of such type of nationalization is seen in Britain when coal, electricity, railways and steel were nationalized but did not touch the profitable banking, insurance chemical and ship building sectors. Later Steel was denationalized by British Labour government. Another example of Reformist nationalization was seen when the Nationalist Revolutionary Movement of Bolivia (NMR) government nationalized Tin mines in 1952.
Nationalization, alteration or assumption of control or ownership of private property by the state is historically a more recent development and differs in motive and degree from expropriation or eminent domain, which is the right of the government to take property sometime without compensation for particular public purposes. However, appropriate compensation for the nationalization of assets has been made mandatory as adopted by the Charter of Economic Rights and Duties of state by United Nations General Assembly in 1974. In case of a bail out government becomes a ‘Shareholder by default’.
Nationalization has accompanied the implementation of communist or cocialist theories of government as was the case in the transfer of the industries, banking and insurance enterprises to the state in Russia after 1918, the nationalization of oil industries in Mexico in 1938 and foreign business in Cuba in 1960. Question of International Law normally arise only when shareholders of a nationalized company are aliens (foreigners). In such situations diplomacy and international arbitration ensure lawful payment of fair compensation.
Arguments for nationalization are many, but here we discuss only a major few.
Natural Monopolies: - It was seen globally that the technical conditions of production are such that competition would lead to a wasteful use of resources. Competition of gas, electricity, water services would to a costly duplication of the networks of mains, pipes, cables etc. which are required to supply these goods and services. It was argued that the full potential economies of scale can be achieved by undertaking only one operation on a national basis. However, these are arguments for monopoly rather than for public ownership. The argument test for nationalization are that (a) the basic industries should be operated in the national interest and not with a view to private profit and (b) only public ownership can ensure that a powerful monopoly position would not be used to exploit consumers.
Adjustment to changing conditions:- One of the main arguments used in presenting the case for public ownership when basic industries such as Coal, Steel, Railways were nationalized was that the state could and would provide the very large injection of capital which were needed to restructure and modernized these capital intensive industries.
Political arguments:- The motives for nationalization are political as well as economical. It is the Central theme of the Socialistic policy. It is an effective means of redistribution of income and wealth more equitably.
Concept of Privatization:- Serious problems arise in trying to judge the efficiency of public enterprises. Efficiency is a measure of success in achieving a given objective, but if the objective is a non-measurable element as operating in the best interest of the public, then any single measure of efficiency is misleading. This was proved to be true in case of nationalization of abandoned Pakistani enterprises. In that case it proved to be a complete failure and a complete mismanagement of resources.
Bangladesh has privatized more public enterprises than any other country. A report on privatization by USAID stated that out of a total 1076 nationalized industrial units 609 were privatized after 1980. The statistics appeared impressive but the substantive accomplishment has been more difficult to evaluate. The privatization policy and related regulatory liberalization have had a beneficial effect on industrial growth and have encouraged private investment. However, inadequate policy planning, lack of consistent political will and a failure to take into account the practical implications of bold development strategies have blunted, even thwarted the impact of the extensive privatization effort. The majority of privatized transactions in Bangladesh have been outright divestitures, i.e. selling state owned enterprises (SOE) through bids from private sector or by negotiation returned the enterprises to their former owners. However, the divestiture has least attractive and least used method of privatization in other countries. Later on the government made a decision to dismantle the nationalized sector. As such a new revised Investment Policy has been formulated encouraging privatization of state owned enterprises. A big leap to the privatization programme was undertaken under new industrial policy. However, the programme was thwarted by bureaucrats, (loss of power), labour front (private entrepreneurs asking for efficiency and profitability) that were being enjoyed by them during nationalization.
On the other hand private investment was shaky for fear of nationalization without fair compensation. As such ‘The foreign Private Investment (promotion and Protection) Act, 1980 Act No XI of 1980 was promulgated guaranteeing safety of foreign investment.
The present government has realized the basic of privatization and therefore started to revamp the private sector by deregulating and selling nationalized enterprises and has taken initiative to set up 100 Economic Zones to attract private investment beside Export Processing Zones. The present government has longer and larger plan to attract private investment to promote private sector led economic growth. Only the basic industries are in the hands of the government. The fruits of the privatization policy of the present government started yielding positive result. As such Bangladesh has moved from her LDC status to Middle Income Country status. From mid-70s to present day export has risen from $300 million to $ 56 billion. This shows how privatization has benefited the economic growth.
The writer is former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com
