Nationalization

The term “nationalization” refers to the situation in which the government of a country takes over a company or an industry. It usually happens with no compensation for the nationalized organizations that is why nationalization is not advantageous for companies’ owners.

Nationalization is the transfer of land, industrial enterprises, banks, transport, or other privately owned property to the state. Nationalization can be carried out through gratuitous expropriation — confiscation, as well as through full or partial redemption — requisition.

Nationalization can occur in two ways:

• voluntary;
• forced.

Voluntary. The state concludes a deal that is convenient for all parties and pays compensation for the property received.

Forced. Compensation is not involved. This version of nationalization is called expropriation.

The goals of nationalization vary but most oftenly, the government seeks to preserve the operation crucial for economic enterprises.

Nationalization is mostly widespread in countries with developing economies. On the other side, states with developed economies normally allow businesses to privatize enterprises. Privatization means a transition from the government into the private business sector.

Purposes of Nationalization

There are several purposes of nationalization utility:

• political;
• prevention of foreign influence;
• need for capital.

Political. Government of a country can decide to nationalize enterprises in order to reduce the income of other country. It usually happens when the relationship between these countries are deteriorating.

Preventing foreign influence on the economy. Sometimes the government of a country can nationalize companies of other countries that are operating there in order to minimize the chances of foreign influence on the economy.

Need for capital. In this case a company offers the government to nationalize the organization. It helps businesses to raise investment from the government as well as attracting potential investors.

Advantages of Nationalization

Nationalization may be appropriate, especially when there are growing risks of unemployment or foreign capital outflows. 

Stable supply of basic services. When basic services, such as water supply, are privately owned, it can create risks for citizens. Nationalization in such cases ensures efficiency of supply.

Protects strategically important industries. Nationalization of strategically important businesses has to do with the fact that it can be dangerous to allow it to be in the hands of a private individual or foreign investor.

Protects the interests of the whole society. Assuming that the purpose of government is to safeguard the interests of society, nationalization businesses tend to benefit society as a whole more than when those businesses were privately owned, and also safeguards the public interest and corrects imbalances in the means of production.

It eliminates monopolies. One of the main advantages of nationalization is that the acquisition of private and foreign companies can lead to a significant reduction in private monopoly.

Mobilizes capital. When businesses are nationalized, large capital can be mobilized to provide large-scale investment.

Disadvantages of Nationalization

Low productivity of nationalized businesses. State-owned enterprises are often run inefficiently, reducing their profits.

Suppression of private initiative. When the government takes over private business, private initiative diminishes, which is also due to a lack of competition.

Corruption and mismanagement. Corruption is often high in government-owned and operated companies.

Political interference. Management that focuses on politics rather than economics can lead to an irrational allocation of resources.

Reduced competition. For example, the state controls the entire oil sector, and the private sector cannot enter the market, to introduce innovations. This can lead to higher prices, reduced competitiveness in this area compared to foreign producers.