Nationalization Meaning Examples From Banking Industry

Nationalization Meaning

Key Takeaways

Nationalization refers to a situation where the government or state takes over a company in the private sector. When the government seizes control of the organization, the result will be ownership or partial ownership. This process can occur for several reasons – to prevent collapse, enhance social benefits, or as a form of investment, to name a few. A common industry that has experienced nationalization is the banking or financial sector. After the global financial crisis, several prominent banks in various countries were nationalized.

The specifications of the ownership can vary depending on the situation. Throughout history, nationalization has resulted from government intervention in the private sector to protect a company and its assets from collapsing or failing. However, the government can also take over control of successful industries to add to its own profit.

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Nationalization Explained

Nationalization is a more common occurrence in developing countries. This is because governments worldwide play an integral role in preserving and advancing their economies Economies An economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read moreto protect their citizens and allow for the highest possible standard of living. Part of this role involves working with the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more and providing assistance in times of need.

During times of economic unrest, such as a war or a financial hardship, the government may help struggling businesses or industries and prevent significant economic impacts.

Although this is the most commonly understood way of nationalization, a government can implement this process for several reasons, including:

To prevent monopolies (or oligopoliesOligopoliesAn oligopoly in economics refers to a market structure comprising multiple big companies that dominate a particular sector through restrictive trade practices, such as collusion and market sharing. Oligopolists seek to maximize market profits while minimizing market competition through non-price competition and product differentiation.
read more)Seize control of profitsSocial reasonsTo provide stabilityAs a form of punishmentTo protect the rights of workersOr as a form of investment

There are both proponents and critics of governments practicing nationalization. Those who favor the method say it can improve the standard of living, and the government should protect businesses from failing when it can to protect employees.

On the other hand, those who oppose nationalization say that free markets should regulate themselves, and it’s not fair to bail out failing companies. They also say it can reduce competition by driving others out of the industry. When this happens, it can discourage innovation within the industry.

Practical Examples

There have been numerous examples of nationalization occurring all over the globe. These examples can give one a better understanding of the concept and why it happens.

Example #1 – Swedish Pharmacies

Firstly, Sweden introduced a bill that would give control of all pharmacies to the government in 1907. However, the bill was rejected, and it wasn’t until 1970-71 that the legislation passed through, giving way to the nationalization of Swedish pharmacies.

The Swedish government established a government-run entity called Apoteksbolaget AB, which was later, renamed Apoteket AB, to overlook and run the pharmaceutical industry in Sweden. In this case, after negotiations with the Swedish government, the pharmacy owners gave up their status as entrepreneurs and became government employees.

Sweden had various reasons for taking control of the industry, including:

Freedom to regulate as needed, rather than worrying about profits.The ability to enhance the efficiency of the sector.And to create a better network of locations for its citizens.

The nationalization of the Swedish pharmacies seemed to be a success. As a result of this nationalization, the number of locations grew from 600 to around 900 in the 1970s, and drug prices were under control.

However, the nationalization didn’t last forever. In 2009, the Swedish government deregulated the pharmaceutical industry to allow more competition to enter the market. Their reasoning behind the deregulationDeregulationDeregulation is repealing existing industry-specific regulations in an advanced industrial economy. Removing inefficient laws reduces government control over the industries, allowing businesses to operate more freely in the international market.read more was for the new competition to provide more than what the government-run organization could – extended hours of operation, additional medication availability, and lower drug prices.

Example #2 – Banks During the Financial Crisis

The nationalization of banks is not necessarily a new concept. However, during the financial crisis between 2007 and 2009, several large governments were forced to intervene in the banking industry or risk them defaulting or becoming bankrupt. As a result, the financial crisis tore apart the global banking industry as banks in several countries completely collapsed, including all Icelandic banking sectors. Other banks that were hit hard during the financial crisis and became nationalized as a result included:

Parex Bank (Latvia)ABN, AMRO, and ASR (Netherlands)Banco Portugues de Negicios (Portugal)Northern Rock, Bradford, and Bingley, and RBS (United Kingdom)The Finish Savings Group (Finland)Dexia Bank (Belgium)

The banking system of the United States was also suffering a crisis and faced the dilemma of whether to nationalize or not.

To instill confidence in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more and the banking sector, the U.S government decided to purchase $250 billion in preferred stock to support the banking industry. Some of the investments went to major banks and financial institutions like:

Bank of AmericaGoldman SachsMorgan StanleyJP Morgan ChaseCitigroupWells Fargo

Although the U.S government bought stock and invested in these financial companies, it didn’t retain any ownership in return, making its status as “nationalized” up for debate.

Advantages and Disadvantages

There are both some advantages and disadvantages to nationalization. As a result, when the concept of nationalization comes up, there are strong supporters on each side. Check out some of these common pros and cons of nationalization:

Advantages

Prevents private monopolies.Protects industries.TaxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more enjoy profits.And therefore, it can be used for social good.Allows for equal treatment among citizens.It prevents companies from collapsing.Encourages having a steady supply of servicesFree to regulate where needed (rather than worrying about income)

Disadvantages

Lack of diversityNo competitionIt can end in mismanagement and inefficiency.Doesn’t allow for entrepreneurship.It can lead to corruption.May have mishandled resources.Exploitaion can happen against customersPolitics may fiddle with business.No shareholders to vote on proposed changes.And, it can be costly to the government and, in turn, its taxpayers.