Nationalization

Nationalization, alteration or assumption of control or ownership of private property by the state. It is historically a more recent development than, and differs in motive and degree from, expropriation, or eminent domain, which is the right of government to take property, sometimes without compensation, for particular public purposes (such as the construction of roads, reservoirs, or hospitals).

Appropriate compensation for the nationalization of existing private businesses is mandated by the Charter of Economic Rights and Duties of States, adopted by the United Nations General Assembly in 1974, as well as by the Fifth Amendment of the U.S. Constitution.

A bailout is a form of nationalization in which the government takes temporary control of a majority of a company and its assets. In such situations the company’s private shareholders may remain, but taxpayers (i.e., the government) also become shareholders by default, though their influence may be negligible. Nationalization, therefore, may occur through the transfer of a company’s assets to the state or through the transfer of share capital, leaving the company in existence to carry on its business under state control. Nationalization may also occur without any form of takeover, reflecting the original nationalized nature of a particular industry, such as public education. In the United States public education is government controlled at state levels.

Nationalization has accompanied the implementation of communist or socialist theories of government, as was the case in the transfer of industrial, banking, and insurance enterprises to the state in Russia after 1918, the nationalization of the oil industries in Mexico in 1938 and in Iran in 1951, and the nationalization of foreign businesses in Cuba in 1960. It is not uncommon, however, for industries such as mining, energy, water, health care, education, transportation, police, and military defense to operate nationally or municipally within democracies under arrangements in which taxpayers, through elected officials, may exert some measure of control over services that are required by a large majority of citizens. Whether such industries should be owned by private businesses, whose overriding objective is the maximization of profit, or by governments, whose primary goal is to ensure cost-effective services, is at the heart of debates over nationalization. In some developing countries, temporary state control of various industrial operations may be implemented to mitigate the lack of a capital market or an insufficient supply of entrepreneurs in the domestic private sector, thus allowing for a sufficiently competitive market.

Questions of international law normally arise only when shareholders of a nationalized company are aliens (foreigners). In such situations diplomacy and international arbitration ensure lawful payment of fair compensation.

States whose nationals tend to be foreign investors are placing increasing reliance upon specific treaty clauses providing for the protection of investments. Since the end of World War II, the United States in particular has entered into such treaties, coupled with clauses conferring compulsory jurisdiction upon the International Court of Justice. Insurance against nationalization, expropriation, and confiscation is also offered by the U.S. government.

Nationalization of companies can have far-reaching consequences, both negative and positive, depending upon the motivations of the nationalizing entities and the impact on shareholders, taxpayers, and consumers. The Suez Canal, owned and operated for 87 years by the French and the British, was nationalized several times during its history—in 1875 and 1882 by Britain and in 1956 by Egypt, the last of which resulted in an invasion of the canal zone by Israel, France, and the United Kingdom to protect their interests, which included maintaining a passageway for the shipment of crude oil from the Persian Gulf. The Suez Canal remains emblematic of the geopolitical implications inherent in nationalization when it is exercised as a means of asserting national and geographic sovereignty.