Nationalization refers to the government’s action of taking control of a company or industry, typically without offering compensation for the loss of seized assets and potential income. This step can result from a country’s attempt to consolidate power, resentment of foreign ownership of key economic sectors, or the necessity to support failing industries.
Key Takeaways
- Nationalization involves transferring the control of privately-owned companies, industries, or assets to the government.
- It often occurs in developing countries and may signal a desire to control resources or limit foreign dominance in crucial industries.
- Frequently, the assets are taken without compensating the previous owners adequately, if at all.
- In contrast to privatization, where government-run operations shift to private control, nationalization moves private entities under government control.
Comprehending Nationalization
Nationalization is more prevalent in developing nations. Privatization, the opposite process, where government entities become privately controlled, is more common in developed countries.
For foreign companies, one of the primary risks of operating in such nations is the possible expropriation of significant assets without due compensation. This risk intensifies in politically unstable regions with stagnant or shrinking economies. Nationalization typically redirects the revenue flow from private sector operators who might otherwise export funds, towards the country’s government.
Nationalization and the Oil Industry
The oil sector has long been a hotspot for nationalization. Historical examples include Mexico’s nationalization of foreign companies like Royal Dutch and Standard Oil in 1938, and Iran’s similar move against Anglo-Iranian in 1951. Post-nationalization, Mexico founded PEMEX, growing into one of the world’s largest oil producers. Conversely, Iran’s economy suffered initially, prompting the re-entry of Britain as a 50% partner in oil production, giving rise to the British Petroleum Company in 1954.
In more recent history, Venezuela nationalized Exxon Mobil’s Cerro Negro Project and other assets in 2007. Exxon Mobil sought $16.6 billion in compensation, but a World Bank arbitration panel awarded them only about 10% of that amount in 2014.
Nationalization in the United States
The United States has also experienced forms of nationalization, typically under the guise of bailouts where the government holds a controlling interest temporarily. Notable instances include the bailouts of AIG in 2008 and General Motors in 2009. However, the U.S. government exercised minimal control over these entities.
An enduring form of nationalization occurred in the case of Amtrak in 1971, when it was transferred to government ownership following the failure of multiple railroad companies. Additionally, post-September 11, 2001, the airport security sector was nationalized under the Transportation Security Administration (TSA).
Related Terms: Privatization, Public Ownership, Economic Nationalism, Asset Seizure.
