Nationalization

Nationalization is the process of the government seizing ownership or partial ownership in an organization, although the situation is temporary in many cases. It is a term that gets applied to situations in which the government or state controls a business or entity in the private sector.

• Nationalization refers to a situation where the government or state takes over a company in the private sector.
• When the government seizes control of the organization, the result will be ownership or partial ownership.
• This process can occur for several reasons – to prevent collapse, enhance social benefits, or as a form of investment, to name a few.
• A common industry that has experienced nationalization is the banking or financial sector. After the global financial crisis, several prominent banks in various countries were nationalized.

The specifications of the ownership can vary depending on the situation. Throughout history, nationalization has resulted from government intervention in the private sector to protect a company and its assets from collapsing or failing. However, the government can also take over control of successful industries to add to its own profit.

Nationalization is a more common occurrence in developing countries. This is because governments worldwide play an integral role in preserving and advancing their economies to protect their citizens and allow for the highest possible standard of living. Part of this role involves working with the private sector and providing assistance in times of need.

During times of economic unrest, such as a war or a financial hardship, the government may help struggling businesses or industries and prevent significant economic impacts.

Although this is the most commonly understood way of nationalization, a government can implement this process for several reasons, including:

• To prevent monopolies (or oligopolies)
• Seize control of profits
• Social reasons
• To provide stability
• As a form of punishment
• To protect the rights of workers
• Or as a form of investment

There are both proponents and critics of governments practicing nationalization. Those who favor the method say it can improve the standard of living, and the government should protect businesses from failing when it can to protect employees.

On the other hand, those who oppose nationalization say that free markets should regulate themselves, and it’s not fair to bail out failing companies. They also say it can reduce competition by driving others out of the industry. When this happens, it can discourage innovation within the industry.

There have been numerous examples of nationalization occurring all over the globe. These examples can give one a better understanding of the concept and why it happens.

Example #1 - Swedish Pharmacies

Firstly, Sweden introduced a bill that would give control of all pharmacies to the government in 1907. However, the bill was rejected, and it wasn’t until 1970-71 that the legislation passed through, giving way to the nationalization of Swedish pharmacies.

The Swedish government established a government-run entity called Apoteksbolaget AB, which was later, renamed Apoteket AB, to overlook and run the pharmaceutical industry in Sweden. In this case, after negotiations with the Swedish government, the pharmacy owners gave up their status as entrepreneurs and became government employees.

Sweden had various reasons for taking control of the industry, including:

• Freedom to regulate as needed, rather than worrying about profits.
• The ability to enhance the efficiency of the sector.
• And to create a better network of locations for its citizens.

The nationalization of the Swedish pharmacies seemed to be a success. As a result of this nationalization, the number of locations grew from 600 to around 900 in the 1970s, and drug prices were under control.

However, the nationalization didn’t last forever. In 2009, the Swedish government deregulated the pharmaceutical industry to allow more competition to enter the market. Their reasoning behind the deregulation was for the new competition to provide more than what the government-run organization could – extended hours of operation, additional medication availability, and lower drug prices.

Example #2 - Banks During the Financial Crisis

The nationalization of banks is not necessarily a new concept. However, during the financial crisis between 2007 and 2009, several large governments were forced to intervene in the banking industry or risk them defaulting or becoming bankrupt. As a result, the financial crisis tore apart the global banking industry as banks in several countries completely collapsed, including all Icelandic banking sectors. Other banks that were hit hard during the financial crisis and became nationalized as a result included:

• Parex Bank (Latvia)
• ABN, AMRO, and ASR (Netherlands)
• Banco Portugues de Negicios (Portugal)
• Northern Rock, Bradford, and Bingley, and RBS (United Kingdom)
• The Finish Savings Group (Finland)
• Dexia Bank (Belgium)

The banking system of the United States was also suffering a crisis and faced the dilemma of whether to nationalize or not.

To instill confidence in the stock market and the banking sector, the U.S government decided to purchase $250 billion in preferred stock to support the banking industry. Some of the investments went to major banks and financial institutions like:

• Bank of America
• Goldman Sachs
• Morgan Stanley
• JP Morgan Chase
• Citigroup
• Wells Fargo

Although the U.S government bought stock and invested in these financial companies, it didn’t retain any ownership in return, making its status as “nationalized” up for debate.

There are both some advantages and disadvantages to nationalization. As a result, when the concept of nationalization comes up, there are strong supporters on each side. Check out some of these common pros and cons of nationalization:

Advantages

• Prevents private monopolies.
• Protects industries.
• Taxpayers enjoy profits.
• And therefore, it can be used for social good.
• Allows for equal treatment among citizens.
• It prevents companies from collapsing.
• Encourages having a steady supply of services
• Free to regulate where needed (rather than worrying about income)

Disadvantages

• Lack of diversity
• No competition
• It can end in mismanagement and inefficiency.
• Doesn’t allow for entrepreneurship.
• It can lead to corruption.
• May have mishandled resources.
• Exploitaion can happen against customers
• Politics may fiddle with business.
• No shareholders to vote on proposed changes.
• And, it can be costly to the government and, in turn, its taxpayers.

This has been a guide to what is Nationalization & its meaning in economics. Here we discuss nationalization and its examples from the banking industry. You may also have a look at the following economics articles to learn more –

• Autarky
• Invisible Hands in Economics
• Keynesian Economics