Nationalization: What Is It?
Bolivian President Evo Morales jolted financial markets on May Day. He announced that his country will forcibly nationalize (or take over) the local subsidiary (daughter company) of Red Electrica, a Spanish electric transmission company.
This news follows on the heels of an announcement of another big takeover in South America. President Cristina Kirchner of Argentina had announced that her country will re-nationalize YPF SA. YPF is a subsidiary of Repsol SA - a Spanish oil company. Argentina claims Repsol is not investing sufficiently in the local company. The takeover was swiftly approved by an overwhelming majority, in the Argentine Parliament last Thursday.
Is this the beginning of a wave of Government takeovers of private companies in South America? What does nationalization and re-nationalization mean? Lets find out.
When Governments take over..
Very simply, nationalization is the transfer of ownership of a private business to the government. The assets and industries of the private business are forcibly brought under government control and run as a government organization. As you can imagine, nationalization will scare away industry and competition. People who work for the government organization could tend to take their jobs for granted which can stifle creativity and innovation. A government's revenue is limited by the taxes they collect and nationalization can result in under-investment in the business and lower growth.
You may wonder why then does nationalization take place? If a private company is troubled and is unable to invest in the business it operates, yet that business is crucial for the country, it could force the government to take over and manage it for public good. Sometimes troubled businesses are nationalized to prevent them from causing a collapse of the economy - remember Fannie Mae and Freddie Mac in the US in 2008? Nationalization is common in developing countries where there are frequent leadership and regime changes. In these cases, it is a way for the government to expand its economic resources and power.
Privatization, on the other hand, refers to government giving up control over assets or industries. To encourage investment and fresh ideas, increase competition and to encourage foreign technology, governments could sell assets. Privatization of industries in Russia, India and Brazil have been responsible for the exceptional growth in these economies over the last two decades. In re-nationalization, the country forces ownership of assets back under the government after they had been previously privatized.
South American Divide
There is a clear divide emerging among Latin American leaders. There are some countries that support and encourage private investment in their economies - such as Brazil, Chile and Columbia. These nations are opening up their economy to more competition and investment from foreign countries. On the other hand, some South American nations like Venezuela, Bolivia and Argentina are seeking greater control of their economies.
While Argentina's move is well supported by the people of Argentina, investors and countries around the world are not pleased. The short-term benefit achieved by nationalization may be lost as investors lose confidence and refuse to take a risk in anything Argentina. It is a double-edged sword and sometimes quick fixes may not be the best solution.