Renationalization is about Politics and Not Economics

February 20, 2015
Bolivia's President Evo Morales greets supporters while on a tour around the Rio Grande oil field. (AP Photo/Noah Friedman Rudovsky, HO)

If there’s a reversal of privatization, why? There are several reasons for a country to renationalize or stop privatization. In some cases, following the prescriptions of the IMF and the World Bank, developing countries privatized industries that were under state control and opened their borders to foreign direct investment. Some of these newly privatized firms failed, be it for the tough economic environment they had to operate in or for many of the same reasons there might have been failings when under state control. In our last post we talked about Bolivia’s renationalization of water companies. Columbia University’s  Joseph Stiglitz reflected on Bolivia’s renationalization efforts saying ,“They did everything right, they liberalized, they privatized and they felt the pain. Now it’s 20 years later, and they’re saying, ‘when is the gain’?”

As political observers, what is key is that the pressure for renationalization has started from the bottom. The rise of income inequality, poverty, and unemployment is fuelling the working and middle class to protest against neoliberal policies. In some developing countries, slow economic growth is the perfect environment for populist parties that promote nationalization policies to blame privatization and foreign trade for the country’s economic failures.  Some went as far as to argue that the 2007 global recession had discredited the virtues of rampant free market policies and it has become more politically challenging for parties to make the case that more markets and less government is a good thing.

One sector that was particularly susceptible to nationalization has been the oil and gas sector. Particularly before this latest slump in oil prices, governments saw the high amounts of revenue that can be made for economic development from nationalizing natural resource industries. Putin’s retaking of Yukos, the oil and gas company that was sold to Mikhail Khodorkovsky under the Yeltsin government, for example, is emblematic of this impulse to take back a nation’s wealth from private interests. Arguably, some of the same reasoning was behind the renationalization of the oil and gas industry in places like Venezuela, Ecuador, Bolivia, and Argentina.

Lastly, corruption and the lack of transparency in privately owned public utility and natural resource industries have caused renationalization of those industries. Stiglitz reflected on this renationalization and its connection to corruption, arguing “Without transparency, it is easy for citizens to feel that they are being cheated-and they often are.” Adding nationalist fervor to the mix — it becomes a popular policy to renationalize when foreign companies are gaining all the benefits of a country’s natural resources and the country receives a smaller slice of the proceeds. When people perceive that their country is being ripped-off by foreign companies, there is political pressure to place a profitable industry back into the public’s hands.

Generally, pundits, analysts, and think tanks view renationalization policies not as a way to maximize economic growth but rather as a way to maximize a state’s political power. As Ian Bremmer aptly noted, “Governments use the tools provided by [renationalization] to accomplish political goals, not to serve the public welfare. This system allows them to minimize political risks they face by maximizing their control over activities that generate substantial amounts of wealth.” In regards to state-owned industries, the traditional argument still permeates the minds of economists; the risk that political pressures will cause the industry to make inefficient economic decisions.

Renationalization can provoke a wave of panic for foreign direct investment, causing an exodus of capital. In our age of capital market interdependencies, the risk is even higher than it was before hot money could leave a country on the whiff of political or economic turmoil. 

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

CIGI Senior Fellow Bessma Momani has a Ph.D. in political science with a focus on international political economy and is full professor and interim assistant vice‑president of international relations at the University of Waterloo.