Nationalization as Privatization in Reverse: Understanding the Nature of the Commons to Identify a Possible Point of Optimal Nationalization, Part 1

editors | 20 July, 2010 20:06

By Lucio Munoz*

* Independent Qualitative Comparative Researcher / Consultant, Vancouver, BC, Canada Email: munoz@interchange.ubc.ca

Abstract:

The ongoing implementation of liberal privatization policies despite open and increasingly generalized social discontent, especially in developing countries, is leading to the search for efficient ways to counteract it. The Soviet Union disintegrated in 1991 while resisting privatization pressure; and to avoid the same outcome, China took more concrete steps soon after the Soviet Union’s collapse going beyond those taken in 1978 to move from a system of full nationalization to allow slowly more and more controlled privatization. This is a policy that continues today, which appears to suggest that the search for optimal levels of nationalization in China is ongoing right now to ensure over all system sustainability. The 2007-2009 financial crises affecting western countries including the United States showed that fully uncontrolled markets can lead to system collapses too; and steps are being taken to ensure the existence of more controlled private forces.

However, not much is written about the possible relationship between privatization and nationalization processes and the possible existence of optimal levels of nationalization. The main goal of this paper is to introduce new ideas, concepts, and analytical tools related to the commons under different pressures, which can be used to frame a possible point of optimal nationalization.

Introduction

a) Defining the commons

The commons is a term that has been usually used to describe the pool of resources that belong to the public domain. In other words, the commons is a public asset, either under specific, but unclear use or under communal use. When the commons is under specific use and unclear access controls, the commons is bound to experience the tragedy of the commons(Hardin 1968) as rational actions or individuals would lead to its destruction. When the commons is under communal use and clear access controls, the commons is bound to be nurtured, up kept, and protected(Rowe 2008), as again rational actions or individuals would lead to what the author calls “The happy commons”.

b) The commons and conservative policy

In general, a conservative policy is directed at maximizing the allocation of the commons for social use in egalitarian ways and minimizing its privatization. The allocation of the commons to social use is not based on how much income/resources the individual or group has, but on the individual/group’s right to access public resources to maximize social welfare and stability. Hence, social protection or social issues are of paramount concern. For example, social concerns have traditionally been the driving force behind the search for equity in access to land in Latin America(Muñoz 2001).

This conservative approach is usually called the welfare state model, which uses distribution mechanism outside the market to achieve social harmony and avoid too rich, too poor power struggles. The egalitarian role of the conservative state is not an easy one, redistributive policies such as land reforms are difficult to implement and sustain unless there is a very strong political will and a very strong technical and non-technical grassroots organization(Adams 1995).

Hence, the central theme of this conservative state development approach is the notion that the author calls “Nobody is left behind” mode of government action. However, public assets under the conservative policy of the commons are under constant pressure from private forces as they are not nationalised public assets, just public assets under communal and non-communal uses; and therefore, they are not outside the market’s domain. For example, the wave of land reforms promoted by the World Bank in developing countries including in Colombia since the 1990s were done through market based approaches(González and Lopez 2003) as market mechanisms are supposed to be more efficient than non market approaches in redistributing land, in particular, and the commons, in general. So as long as public assets are not nationalized they will be under the pooling influence of privatization pressures.

c) The commons and liberal policy

The liberal policy aims at minimizing the use of the commons for social use and maximizing its privatization. This is usually known as the liberal market model that is expected to sooner or later trickle down and based on perfect market assumptions. The allocation of the commons to private use is then based here on how much income/resources the individual or group has as it is implemented through the free market. Kelly(2006) points out that the conversion of the commons to private use in the USA intensified during the 1980s when the Reagan administration endorsed this policy as an efficient policy; and it was spread all over the world by institutions like the World Bank and the International Monetary Fund. However, it was stressed recently that the perfect market under sustainability requirements is not sustainable(Muñoz 2001).

The central theme of this liberal state development approach is the notion that the author calls “Only a few will be better off” mode of government action. It is a fact, the rich are getting richer and the poor are getting poorer and governments are increasingly less able to meet the goal of “nobody is left behind” as the expected assumption of trickle down associated with privatization programs mentioned above has not materialized yet. It was pointed out recently that the Embudo Effect explains why the rich are getting richer under liberal agricultural policies implemented under extreme inequality conditions(Muñoz 2009) as then the trickle down assumption does not work; and hence the Embudo effect allows most benefits to accrue to the rich.

As privatization approaches the point of full privatization, social issues and goals will most likely not be met as whole states can be paralysed when corporate or immense market forces are not allowed to go the way they want to go. Ramonet(1998) pointed out that as corporate mergers get bigger and bigger they have the cloud to transform countries into dwarf states and behave practically as they wish. Hence, without nationalization or limits, the public system will tend towards the full privatization model in the long-term.

d) The commons, non-optimal nationalization and non-optimal privatization policy

It seems that up to today, nationalization policies and privatization policies have been used or implemented with no optimal goals as guiding principles, which in the long-term leads to excesses and waste.

i) Non-optimal nationalization policy

Nationalization policy has been used as a non-optimal reactive, counter privatization policy to ensure social protection from uncontrolled capitalism instead of as a proactive optimal policy to ensure effective social protection while encouraging controlled capitalism. For example, the two main uses of nationalization policies under the banner of social protection are: 1) To protect remaining public assets from market forces or creeping development; and 2) To revert key private assets to public use. For example, Gordon(2006) indicates that the 2006 nationalization of oil and gas industry in Bolivia was implemented under the goal of recovering state property and control; and therefore, as a reactive, specific sector counter privatization policy

And hence the goal of nationalization, if there is one, is social protection, not optimal social protection. Nationalization actions are taken without a clear idea of how much social protection is efficient protection. Nationalization beyond the optimal point would lead to excess nationalization and waste. The author believes that how much of the commons is nationalized should be based on how much of the commons is needed to be under public use to meet national social goals/welfare; and that once that nationalization point is reached, the rest of the commons should be in private hands.

ii) Non-optimal privatization policy

Privatization policy has been used as a non-optimal active, counter welfare state policy to ensure individual protection from an over controlling state instead of as a proactive optimal policy to ensure responsible capitalism and ensuring effective social protection. For example, the two main uses of privatization policies under the banner of efficiency are: 1) To open up remaining public assets to market forces; and 2) To promote a culture or need of more and more maximization or growth is better. For example, the Commission on Growth and Development released a report with the aim of spreading the culture of more sustained growth is needed to push developing countries out of their development shortcomings(TCGD 2008).

And hence the goal of privatization, if there is one, is uncontrolled capitalism, not responsible capitalism. Privatization actions are taken without a clear idea of how much capitalism will hinder efficient social protection. Privatization far away from the optimal point would lead to excess capitalism and waste. The author believes that how much of much of the commons is privatized should be based on how much of the commons needs to be left out under public use to meet national social goals/welfare; and that once that privatization point is reached, the rest of the commons should be nationalized.

iii) In summary:

There is a need to avoid excess nationalization and to avoid excess capitalism, and to create a nationalization policy guided by the search for optimality or efficient social protection. Such an allocation of the commons to public use would be an optimal allocation as it would allow meeting social/public goals while still permitting some controlled, but efficient privatization. In other words, an optimal nationalization point would be the one that meets social goals while allowing controlled private forces to exist.

e) The commons, full nationalization, full privatization, and sustainability

Sustainability suggests that full nationalization and full privatization processes will backfire in the long-term as they work outside sustainability principles. Full nationalization leads to state/bureaucratic self-interest excesses; and full privatization drives towards individual/corporate self-interest excesses, which through time can lead to the system demise and/or model realignment, as detailed below.

i) The case of full nationalization

The recent history of the commons under unrestricted full nationalization in the Soviet Union appears to indicate that full nationalization will be unstable in the long-term as it creates operational inefficiencies, which without a private option are perpetuated. It can be said that the Soviet Union era lasted about 74 years, it started with the Russian revolution of 1917 and ended with its dissolution in 1991. It resisted the opening of doors to privatization until almost the end, when it was cash empty and short of food. Gaidar(2007) points out in relation to the Soviet Union’s collapse the following: a) that the Soviet Union leadership ignored advice provided by key advisers in the late 1970s on the option to introduce privatization in the lines of that in China and so keeping stability and control, but they decided to follow a different route; and b) that the collapse could be understood simply by a story of grain(scarcity) and oil(mismanagement and unpredictable revenue).

By discouraging privatization and competition and working beyond the optimal level of nationalization, the Soviet Union allowed the increasing accumulation of widespread state/bureaucratic financial, production, and resource use inefficiencies across the commons creating in the process, what the author calls in this paper, “excess nationalization, social welfare waste, and privatization deficits”, which rendered the system in the end politically unstable.

In other words, the unrestricted socialist program implemented by the Soviet Union operated under excess nationalization, social welfare waste, and privatization deficits, which long term led to a system breakdown. Then, the quick privatization that followed the break-up of the Soviet Union helps us to see the social instability and health implications of privatizing all state assets too fast. Stuckler et al(2009) found in a study of massive and quick privatization and health issues in former members of the Soviet Union that fast and huge national privatization programs have a significant impact in adult mortality trends.

China on the other hand, started to allow privatization in the late 1970s in a very slow fashion, and it apparently quickly learnt the lesson from the experience of the Soviet Union described above to maintain political stability: i) The need to avoid social welfare waste; ii) The need to bring in controlled privatization below national level by allowing private forces to set up shop and access assets of local or provincial relevance; and iii) The need to bring change in slowly. Hence, right now the Chinese system is slowly moving away from full nationalization and in that way maintaining political stability. Cao(2000) points out the following: a) That since 1978 China has an open door policy towards international capitalism; b) That privatization in China has been planned to take place first, not in the state sector, but in a lower parallel sector acting as a social cushion with the possibility of later privatizing the state sector if all goes well; and c) That China has planned to implement capitalism through a socialist market.

Hence, the rise of privatization in China can be said to be a locally oriented slow process driven by a market under the spell of social goals. In other words, China has planned the slow introduction of capitalism in the sectors below national or state relevant assets to maintain stability and insulate the state sector from expected or unexpected initial changes or shocks. Breslin(2004) points out the following about the Chinese move towards capitalism: a) That China created a primitive state controlled hybrid system where a state public system and a non state, often local, private system now exist side by side; and b) That the process towards privatization has gone through three periods: policy reformulation period(1978-1984), Old system abandonment period(1984-1994); and the macroeconomic turning period(1994-to now).

See then that the private market in China is controlled by the state; and that China’s period of old system abandonment(1984-1994) coincides with the period of downfall and breakup of the Soviet Union(1985-1991). And this indicates that China took into account the political instability leading to the breakup of the Soviet Union; and the fast privatization implemented by its former members after the breakup when deciding to take further steps towards more controlled capitalism.

And currently, the experiences of the Soviet Union and of China with privatization are facts that perhaps are putting pressure on other countries under full nationalization such as Cuba to allow some type of controlled privatization too and move away from full nationalization. Tamayo(1996) reported that privatization was already taking place in Cuba under official denials; THJ(2007) reported the expectation among participants in a panel discussion about the future of Cuba that Cuba was on the way to the free market economy; and TBI(2008) reported that Raul Castro is expected by observers to lead Cuba through a slow privatization process similar to that in China

And perhaps, the experiences of the Soviet Union and that of China with privatization are lessons that current governments such as those of Venezuela and Bolivia should take into account to start thinking about nationalization policy from the optimal point of view, not based on the old reactive model, to achieve efficient social protection and controlled, but efficient privatization. It has been reported that nationalization policy is sweeping Venezuela under President Hugo Chávez(Ingham 2007) with more intensity. Hults(2007) points out the following: i) That nationalization started in Venezuela 1975, when then-president Carlos Andrés Pérez expropriated assets from private oil companies and created the state company Petróleos de Venezuela, S.A; and ii) That nationalization pressures intensified when President Hugo Chávez won election in 1998 as when entering office in 1999, he began implementing policies aimed at taking control of this state company to support nationalization’s aims. Now, nationalization in Venezuela has spread to other sectors in the oil industry such as oil service contractors(Arostegui 2009) and to other sectors of the economy such telephone, electricity, and now banks(Simon 2009).

On the other hand, it has been stated that the election of Evo Morales as president of Bolivia in 2006 has been taken by observers and investors as another sign that Latin America is going left, increasing the nationalization risk(Zissis 2006); and that the 2006 nationalization of the Oil and Gas sector in Bolivia is the third out of four nationalization attempts since 1936 in the same industry(Jova 2006).

ii) The case of full privatization

The recent history of the commons under unrestricted full privatization and globalization in the USA and other developed countries appears to show that full capitalism will be unstable in the long-term too as privatizing the commons above and beyond what is needed to meet social/state goals or far away from the optimal level of nationalization brings in long-term unsustainability. The recent financial crisis exposed the need to make capitalism a socially responsible and accountable system and move it away from its irresponsible past. Mcintosh(2010) pointed out in his foreword piece of “Capitalism in Question” with the financial crisis in the background the following: 1) That economic governance needs a big overhaul; 2) That the model of economic growth itself has now fallen into question; 3) That a model that provides both private and public benefits at the same time is now desirable; and 4) Then we can have a society that is sustainable.

Hence, free capitalism is leading to the increasing accumulation of widespread individual/ corporate self interest excesses or inefficiencies across the commons, creating in the process, what the author calls in this paper, “excess capitalism and social welfare deficits”, which are capable of rendering the system in the end politically unstable and lead to system breakdown and/or realignment. Truman(2009) pointed out four types of possible causes behind the 2007-2009 financial crisis: 1) macroeconomic shortcomings; 2) regulatory shortcomings; 3) abuses in promotions of new and little understood financial instruments; and 4) abuses in exposure or risky behaviour, but he felt that in his view macroeconomic and regulatory failures were at the heart of it. However, IBT(2010) reported in January 2010 that Mr. Lloyd Blankfein, Goldman Sachs CEO, blamed excess credit and excess liquidity as the main drivers of the financial crisis when addressing The USA Financial Crisis Inquiry Commission. Notice that all of those causes are in one sense or another excesses which are expected under full capitalism so it can work as efficiently as those financial officers expected it to be, but they underestimated or did not care about the social pain and flashback associated with it.

Apparently, the USA and other developed countries have quickly learnt the lesson from the excesses described above, the need to avoid unrestricted capitalism and to avoid the presence of social welfare deficits to maintain political stability as they have recently taken coordinated leadership in implementing regulatory measures that will avoid corporate/individual excesses and that will achieve more predictable social protection. President Obama is planning to take action right now on limiting the activities and size(WH 2010) and the risk taking behaviour(TWSJ 2010) of banks. Hence, right now the USA system is in the process of slowly moving away from full unrestricted privatization towards more controlled privatization and maintaining that way political stability. The European Union has been coordinating regulatory and crisis recovery actions with the USA since 2008 when the EU leadership called for the realignment of the international financial framework(EC 2008); and right now they are pursuing an ongoing coordinated response to seeking tighter financial rules within their borders and internationally to address now well-known system flaws(EC 2010).

And currently, the experiences of the USA and other developed countries with unrestricted privatization are facts that perhaps are putting pressure on other countries, especially developing countries around the world to control more closely their local privatization programs and speed; and move away from local unrestricted privatization programs as they do not have much control over the forces behind international capitalism. Soon after the financial crisis stroked in 2007, the World Bank moved to point out the high vulnerability developing countries, especially the poorest ones, have when facing an international financial crisis that is not of their making; and it challenged policy makers, among other things, to take actions to address their financial crisis in a way that do not push developing countries to worse development conditions than before the crisis(TWB 2008).

iii) In summary:

Historical facts appear to suggest that full nationalization scenarios and full privatization scenarios do not meet the true sustainability test in the long-term, that where social, economic and environmental values can be conjecturally met; and therefore, they should be avoided. This suggest that if sustainability is the goal, the aim is then to find an optimal level of nationalization, the point where social goals are met and excess privatization avoided; and therefore, there is a need to avoid processes of full nationalization and of full privatization.

The need to identify conditions leading to optimal nationalization policies

Hence, nationalization policy and privatization policy have been used as non-optimal opposing tools, not as optimal tools for effective social protection. Yet, not much is written about the relationship that may exist between privatization processes and nationalization processes; and about the nature of possible optimal levels of nationalization, levels where social/public goals are achieved while providing some room to efficient private forces. This paper intends to share some ideas on the issues mentioned above.

Goals of this paper

The main goals of this paper are: a) To show that nationalization can be understood as privatization in reverse; b) To point out how these ideas can be arranged in a way that it is possible to point out a possible level of optimal nationalization; and to highlight the consequences of operating short or beyond of it; and c) To use the framework mentioned above to capture the process by which China is right now slowly moving away from full nationalization and going towards the optimal nationalization point; and to stress the implications of this.