On Renationalization and Sector Incentives

January 30, 2015
VIA Rail train travelling through Northern Ontario. (Ryan Keene via Flickr CC)

What does nationalization or renationalization mean? How far does a state have to go in buying private shares or assets before it is considered to be renationalized? The term can be ambiguous because it can mean something different to each country. Analysts, pundits, and think tanks are nowhere near a consensus for what is considered renationalization, let alone whether this strategy is useful or helpful to the development of emerging market economies and developing countries.

On the surface, one could argue that renationalization involves the state or government buying back assets or industries into state ownership after the industries had previously been privatized. Ian Bremmer, geopolitical consultant and now foreign affairs editor for Time magazine, has highlighted the types of sectors in the economy that are often subject to renationalization. He found that industries most renationalized are “natural resource companies, public utilities, banks, transportation and automotive manufacturers.”

Historically, many of these firms and industries were viewed as quasi-public goods that required large state investments to get up and running. Think of Canada’s initial public ownership of telecom and rail. The argument for having these nationalized firms is that the private sector would not have the same incentive to service remote communities, the way governments would. So, state ownership was necessary to get these public goods across the country. In building a nation, these publicly owned industries served the broader goals of development.

Starting in the 1970s, throughout much of the developed world and then Latin America, the move away from nationalization started to turn. Inefficient production and services had plagued the state owned sector. As innovation and technological change of the 1980s and 1990s accelerated, it became less and less desirable to have the state involved in making these types of decisions at the firm level. Call it the wave of Reagan-economics, neoliberalism, globalization, Washington Consensus, or free market policies — the end was a global consensus that it was best to privatize and get the government out of determining prices, production, and decisions in company boardrooms.

This seemed to work. The global economy generally flourished throughout the 1990s. Many developing countries were now frontier economies of the emerging markets and those in the Western world were well on their way, it seemed, toward consolidating their free market policies. Capital markets were abundant and capital flows moved smoothly across the globe to fill financing gaps at the firm level.

It was hard to find dissenting views against free market economics. From the halls of economic departments at universities to the corridors of power and business, there seemed to be a consensus on the one way to run an economy: attract foreign investment, promote a healthy business environment that could flourish, make sure companies are competing to provide the best products and services to consumers, and most importantly, the role of government was an umpire and not a player in the market.

What went wrong? The global financial crisis changed the dynamics of international politics and wealth, tune in to our next blog to find out how….

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.