Nationalization over Privatization
The Process of taking an industry or assets into government ownership by a national government or slate is known as nationalization. A nationalized industry is one which produces output for sale to consumers and other producers by the way of markets but which are solely owned by and under the control of the government. On the other hand privatization is the process of moving from a government controlled system to a privately-run one.
Nationalized industries are managed by a board of managers appointed by the state; a government minister is usually the person in charge.
The implementation of nationalization in a country’s economy may have huge positive impacts in that country as consumers, government, and more importantly, the economy receive benefits. These state owned industries are funded by long-term loans, or subventions also known as subsidies, from government. It can occur through the transfer of company assets to the government or through the transfer of public shares, leaving the company to run the business under government control (Khan). A Government can nationalize any firm in a country whether it is a water company, electricity, telecommunication and more popular, banks.
Some firms are unable to manage their risks properly so the Government comes in to provide more positive externalities. Aims of state owned enterprises may not necessarily comprise of making a profit but rather to operate in the consumers’ interest while the gap between poor and rich is reduced in the process. Nationalization is mainly in favor of the public. “The State’s assessment of public purpose is accepted on the ground that the State is the best judge of whether or not the nationalization serves a public purpose” (Sornarajah).
Nationalization of an industry may result in production costs being lowered therefore goods and services will be available to the nation’s consumers at low prices. In addition Nationalization entails that the distribution of wealth become uniform and just. It prevents exploitation of consumers whereas in private ownership the capitalists become richer while the poor laborers grow poorer. This results in a rise in inequalities, that’s where Nationalization comes in to reduce inequalities effectively.
Moreover unhealthy competition and corruption between firms and capitalists is demolished. “Big and powerful capitalists try to crush their small rivals” (Chaterjee). This is also against national interest. Loans at lower rates are accessible to consumers in the case of bank nationalization. In favor of the government they are able to manage their country’s economy by controlling important industries, such as monopolies. They make their services more efficient even though it comes as a cost they benefit from this when good feedback is received from the population mass.
Companies owned by the people for the people take social costs into account and the profit goes back to the people. The economy also receives a major boost as Nationalization involves a lot of government expenditures. Government expenditure includes all government consumption and investments made by state. It involves the acquisition of goods and services for use to directly satisfy individual or collective needs of the population in a country intended to create future benefits.
Nationalized industries, also known as government owned corporations, state owned companies, state enterprises as well as state owned entities, charged with operating in the public interest, may be under strong political and social pressures to give much more attention to externalities. They may be obliged to operate some loss making activities where social benefits are clearly greater than social costs. For example: rural postal and transportation services. The Government recognizes social obligations and provides subsidies for such non-commercial operations in some cases.
Moreover, since nationalized industries are state owned, the Government is responsible for meeting any debts stumbled upon by these industries. Nationalized industries don’t normally borrow from the domestic market other than for short-term borrowing and is in general a non-profit organization. However, if they are profitable, the profit is often used as a means to finance other state services, such as social programs and government research which can help lower the tax burden. An issue in nationalization is the payment of compensation to the former owner or owners.
The most controversial nationalizations are known as expropriations, are those where no compensation, or an amount far below the likely market value of the nationalized assets, is paid. Much nationalization has come after revolutions through expropriation, mostly in revolutions led by communists. When nationalizing a large business, the cost of compensation is so great that much legal nationalization have occurred when important firms or industries run close to bankruptcy and are then acquired by the Government or little or free. Other times, Governments have seen it important to gain control of institutions of great economic value as well as citizen importance, such as banks or monopolistic service providers, or of important industries struggling economically. “State or local authorities have traditionally taken private property for such public purposes as the construction of roads, dams, or public buildings. Known as the right of eminent domain, this process is usually accompanied by the payment of compensation.
By contrast, the concept of nationalization is a 20th century development that differs from eminent domain in motive and degree; it is done for the purpose of social and economic equality and is usually, although not always, applied as a principle of communistic or socialistic theories of society” (Margolis). Communism is defined as a theory or system of social organization based on the holding of all property in common, actual ownership being ascribed to the community as a whole or to the state (Dictionary. com). Moreover, there are principles which govern communism. One of the contradictions in communism most frequently highlighted is that between the theory and the practice. While this is to some extent justified, it also needs to be borne in mind that, as with most concepts, there is no single theory of communism, rather there are numerous theories and variations on a theme – and some versions of the theory are more compatible with the practice than others” (Holmes Chpt. 1). Principles such as: * The expropriation of landed property and the use of rent from land to cover state expenditure. A high and progressively graded income-tax. * An abolition of the right of inheritance. * The confiscation of the property of all emigrants and rebels. * The centralization of credit in the hands of the state, by the establishment of a state bank with state capital and an exclusive monopoly. * The centralization of transport in the hands of the state. * An increase in the state ownership of factories and instruments of production, and the redistribution and amelioration of agricultural land on a general plan. Universal obligation to work and creation of labour armies especially for agriculture. * The unification of agricultural with industrial labour, and the gradual abolition of the differences between town and country. * The public education of all children. Abolition of factory labour for children in its present form. Unification of education with economic production. (Karl Marx) On the other hand, socialism, an economic system, is characterized by social ownership and control of the means of production and cooperative management of an economy.
Social ownership may refer to one or a combination of the following; Cooperative enterprises, common ownership, direct public ownership or autonomous state enterprises. There are many variations of socialism and as such there is no single definition encapsulating all of socialism. They differ in the type of social ownership they advocate, the degree to which they rely on markets versus planning, how management is to be organized within economic enterprises, and the role of the state in constructing socialism. (Mr. Reasonable) State owned non-profit organizations generally work in the interest on the public.
Nationalization tends to occur more often in the natural resources and utilities sectors. Nationalization of natural resource industries tend to happen when the price of the corresponding commodity is high. Privatized industries struggle with production costs, they tend to raise the bar on their prices thus the poor people’s pockets are hurt. Due to this exploitation is present, this is popular within monopolies. These enterprises do not experience competition from other firms as they are the sole suppliers of a good or service in an economy.
They take advantage of this by raising their prices whenever they please knowing that their commodity’s demand will not drop but profit will rise considerably. “The monopolistic firm is a price maker and has some power over the setting of price or output. It cannot however, charge a price that the consumers in the market will not bear” (tutor2u. net). They significantly charge high prices on their goods and services and in some cases, fire workers in order to reduce cost of production. Moreover, workers who have mouths to feed and bills to pay.
On the other hand, a monopoly owned, run and controlled by the government will stop consumers from being exploited. How, you may ask? Government expenditure and investment may cover all major production costs correspondingly reducing prices on goods and services provided by the monopoly. At the same time, employment is generated rather than depleted. The Government works in favor of the public, additionally in favor of its country’s economic wealth fare and increasing the employment rate and decreasing the unemployment rate is a plus as well as a good name for the state.
According to Kabbani Construction Group (KCG), a nationalization program supporting the qualified national work force as developed. KCG plans to replace foreign labour with Saudi nationals in order to encourage and increase employment of young Saudi nationals through nationalization. So indeed, this is a strategy used by state to decrease the unemployment rate in respective economies. Furthermore, the presence of nationalization in an economy slightly reduces the gap between the rich and the poor people in society. We very often see the situation in an economy where the rich get richer and the poor get poorer.
The causes of this may include generally high prices for goods and services set by the rich business men only affordable to their fellow wealthy counterparts, the poor then suffer when they take the little that they have from their pockets and give it to the rich when they purchase the certain goods or services offered. This is a result of poor redistribution of wealth. As defined by wisegeek. com, the redistribution of wealth is the orderly transfer of assets from one group of entities to a broader range of entities, usually by utilizing some sort of mechanisms put in place by a government.
Sometimes known as progressive redistribution, the idea is to allocate available resources in a manner that a wider range of people receive some degree of benefit from those assets. Nationalization is often used in the process of the redistributing of wealth. It is a broad concept that may include strategies such as government offering funded health care plans to citizens qualified. With other methods the goal is to ensure that everyone, both rich and poor, in a given country has access to and receives benefits considered to be necessary for a respectable standard of living.
The poor may not be able to fund those benefits but that is where the government comes in to play by reducing the costs on the backs of such citizens. An example of this may include the government providing a free health care program to the less fortunate. The elimination of price discrimination is also a strategy used by the government to reduce the gap between rich and poor. Price discrimination is a pricing strategy that is adopted by private firms where they charge customers different prices for the same product or service.
In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price. The poor could really be at a disadvantage according to how the firm conducts its price discrimination. This can be eliminated due to nationalization. The government then comes in to establish price control. They dictate ceiling on the prices of essential consumer goods to keep cost of living within a manageable range on behalf of the lower class.
Additionally, the government lowers interest rates on loans to stimulate the economy, allowing people of the public to access it. When a bank is nationalized ownership or control of that bank is transferred from the shareholders to state. This usually takes place when the state sees it unfit the way the bank is operating under its shareholders, especially when it may be on the path of bankruptcy. In more recent times, the failure of major banks has highlighted the fact that, under national ownership and control, failing banks can be funded more quickly and for larger amounts than under private ownership.
This enables the banking infrastructure to be rebuilt, as well as ensure the closer regulation of banks in the future. Douglas J. Elliot explains this in his book ‘Bank Nationalization: What is it? Should we do it? ’ Bank regulators have stood ready for decades to take over an insolvent bank, or one on the brink of insolvency, if it is not possible to neither find private capital to neither shore up the bank nor find a strong acquirer. Often applied to small banks, this practice has applied even to quite large banks in rare circumstances. Government can take 100% ownership or simply a commanding majority stake.
This choice depends heavily on what purposes the nationalization is intended to achieve. It is feared that some banks receiving large quantities of government aid will never be able to support themselves independently again, bleeding taxpayer resources until they are eventually cut off by the government and taken over. In such a case, the cost to the taxpayer may be considerably smaller if a bank is taken over quickly. Through nationalization, the state can manage the economy more effectively by means of controlling the important industries in its respective country.
In any economy, the state should exhibit some sort of control over the affairs taking place on a day-to-day basis. Price control and quantity control are two strategies of government intervention governments practice in managing an economy. Nationalization allows government or state to intervene in economic activity Government intervention is an action taken from the government that alter or change economic activeness, supply ability, and unconstrained decisions made through normal market trade is the definition given by webdynamic. com. ……………government intervention through nationalization in the market/economy set out to attain two main goals: “Social efficiency and equity. Social efficiency is achieved at the point where the marginal benefits to society for wither production or consumption are equal to the marginal costs of either production or consumption. Issues of equity are difficult to judge due to the subjective assessment of what is, and what is not, a fair distribution of resources. ” Externalities are spillover costs to society. Whenever there are external costs, the market will lead to a level of production and consumption above the socially efficient level.
Whenever there are external benefits, the market will (ceteris paribus) lead to a level of production and consumption below the socially efficient level. ” (John & Mark) At times, economies may respond sluggishly to changes in demand and supply. Time lags in adjustment can lead to a permanent state of disequilibrium and to problems of instability. With the government in charge of industries and firms, they ensure that changes in demand and supply are responded to in a timely and systematic fashion so that the market stays stable.
Furthermore, the state reduces externalities, doing so with the use of taxes and subsidies. Externalities can be corrected by imposing tax rates equal to the size of the marginal external cost, and granting rates of subsidy equal to marginal external benefits. Extensions of property rights may allow individuals to impose unfair costs on others. State takes charge of these properties and cut down on the costs thus influencing more customers to divulge in ongoing activities. Investment in economic theory is the amount of a good that is purchased, not to consume but to be used for future production.
Nationalization involves a great deal of this as government primary source of capital in a nationalized firm is investment. State invests in raw materials, human capital, and inventory to name a few. Human capital includes costs of additional on-the-job training for employees. The investment of inventory is the accumulation of items which will be used in production such as machinery and vehicles. The government uses these investments to improve the efficiency of their goods and services to distribute to their consumers. Governments also make investments in raw materials. “1949 – Steel was first nationalised in 1949, and privatised a year later by the new Conservative government. It was re-nationalised in 1967 when over 90 of steel capacity was put under the control of the British Steel Corporation (BSC). Steel was returned to the private sector once more in 1988. ” (economicsonline. co. uk) An example of raw materials being nationalized by use of investments in steal is presented above. * “In 1948 railways were nationalized to help rebuild the network infrastructure and re-equip the rolling stock after the destructive effects of the Second World War. This is an example of inventory investment. More Efficient goods result in more satisfied consumers and the government works towards that aim in ensuring that the public is vastly satisfied with the services and goods provided. Social costs are the costs to society as a whole for producing one additional unit, or taking one more measure in an economy. These cost of producing one extra unit of something is not simply the direct cost sustained by the producer alone, but also must include the costs to the external environment and other stakeholders thus effecting the people. A standard example of this is that of a factory the smoke from which has harmful effects on those occupying neighboring properties” (Coase 1). Other social costs could include other forms of pollution, which could arise from the advancements through additional units in production. Another form of pollution consists of excessive garbage pollution. Social costs might as well include solid waste from the garbage trucks on neighborhoods along the routes taken as well as the impacts of solid waste facilities themselves. Moreover, Adverse effects on roperty values, community image, and aesthetics, as well as the increase of noise, odor, and traffic all contribute to social costs. With this said, the state takes it as their responsibility to take these social costs into account so people get compensated, for companies owned and run by the people for the people take social costs into account and the profit goes back to the people. They are allowed to do so as they have the adequate funds and money in their possession in contrast to private owner firms who don’t have the monies available and leave the public to suffer due to social costs.
It is also their duty that the public stays with a mutual feeling towards them. Lastly, nationalization in an economy can influence a rise in the economy. Injections into the economy from the government are the really the main sources. We have already covered the point that governments invest in newly nationalized industries in order to make their goods and services more efficient but that is not the only effect it has in a business and economic stand point.
Investments not only serve an efficient purpose but these injections are represented in the national income formula as government expenditure and government spending, which when increased results in an increase to national income. The national income formula states that national income equals consumption plus gross private investment plus government consumption expenditure plus net exports (Y=C+I+G+X). Knowing this we could say that in a situation where, in a given year national income was five thousand dollars with government expenditure being one thousand dollars.
In the following year, the government decides to take over the assets of a coconut products producing plant. The state invests two thousand dollars worth of capital into that firm; this includes investments in raw materials, human capital and inventory. This two thousand dollars goes into the national income equation as an addition to government consumption expenditure raising it from one thousand dollars to three thousand dollars. Hence, national income increases by two thousand dollars taking it to seven thousand dollars. Consumers, governments and economies all benefit from the positive that nationalization imposes when it is implemented.
Governments are the main nationalization mechanisms as they are allowed to exhibit their control over the affairs in an economy and also to represent the people and protect them from the stress bearers known as private owners. Governments can either fully take over an industry or only see that an industry is run under their supervision. Nationalizations are funded by loans and subsidies to help cover production costs without having to operate at a full loss as they do not aim to make maximum profits unlike the private owned firms and companies.
At the same time lowering the costs of goods and services distributed to consumers. Out of all the firms which governments may choose to nationalize, national banks are the most popular corporations to be nationalized. Consequently, in doing so government provides the public, access to loans at lower rates. The gap between rich and poor is slightly reduced as exploitation of consumers is condensed. In conclusion, the implementation of nationalization in a country’s economy does have huge positive impacts as consumers, governments and economies benefit.