Nationalization as Privatization in Reverse: Understanding the Nature of the Commons to Identify a Possible Point of Optimal Nationalization, Part 4

editors | 20 July, 2010 20:56

By Lucio Munoz*

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

[continued]

Determining the optimal level of nationalization

While we can nationalize it all, as some communist/socialist countries have done or did, this may not be an efficient move today as empirically it has been shown that some levels of privatization are needed to keep the overall system sustainable.

Persistent full nationalization and total privatization deficits appears to be the empirical reason why the Soviet Block fell or so called Soviet Union effect, which may explain why China became more eager to move towards capitalism allowing slowly more controlled levels of privatization and moving away from full nationalization.

This raises the possibility of the existence of an optimal level of nationalization, a situation where the level of the commons under public use meets social/public goals while allowing for some efficient private use. This situation can be appreciated both through a general asset inversegram and through a specific asset inversegram.

a) Optimal nationalization under the general asset inversegram

Figure 8 below captures the dynamics leading towards this possible point of optimal nationalization using a general asset inversegram.

Figure 8 above indicates that we can nationalize up to point (f), which covers the section of the commons that is not yet under private use, section between point (c) and point (d), but this does not meet social/public goals so it is not optimal. Figure 8 above also shows that we can nationalize all the way to point (h) and allow no private use at point (a), but this would be unsustainable in the long term as it would be subjected to the general asset Soviet Union effect as it would be operating at a total social welfare waste and total privatization deficit level the distance from point (g) to point (h) and from point (a) to point (b) respectively.

Finally, Figure 8 above can be used to express the view that if we nationalize the commons to a point of nationalization such as point (g) and allow some privatization to point (b), then this would be an optimal nationalization point M* as at point (g) social/public goals are met while some efficient private activity can take place. In other words, a point of optimal nationalization M* is a point where the commons is in an optimally compromised state.

In summary, Figure 8 above can be used to say the following: 1) That an optimal nationalization point M* is possible at point (g); 2) That nationalizing beyond that point (g) = M* or to the right of it is not a good choice as doing this may make the overall system unsustainable as we would be operating under social welfare waste and privatization deficit; and 3) That allowing privatization beyond point (g) = M* or to the left of it, would lead to excess capitalism and to a social welfare deficits rendering those governments unable to meet their social goals. Hence, the optimal nationalization point M* in Figure 8 above is more than just social protection, it is the point of effective social protection.

b) Optimal nationalization under the specific asset inversegram

Figure 9 below shows the nature of the optimal point of nationalization(M*) of national(N) and local(L) assets and its characteristics.

Line M* in Figure 9 above indicates the following: 1) That optimal nationalization requires the nationalization of assets of national interest(N) and of assets of local interest(L) up to line M* and the introduction of privatization of national assets(N) and of local assets(L) as indicated by section “a” and section “b” respectively; 2) That if we nationalize to the left of line M*, there will be nationalization or social welfare deficits and excess capitalism of national and/or local assets, a non-optimal situation; 3) That if nationalize to the right of line M*, there will be excess nationalization or social welfare waste and privatization deficits of national and local assets, another non-optimal situation; and 4) That at line M*, there is no social welfare waste, no excess nationalization, no privatization deficits, no excess capitalism, and no social welfare deficits of any kind as it is the optimal point of nationalization.

In summary, Figure 9 above can be used to say the following: 1) That an optimal nationalization point is possible at point M*; 2) That nationalizing to the right of that point M* is not a good choice as doing this may make the overall system unsustainable as we would be operating under social welfare waste and privatization deficit; and 3) That allowing privatization to the left of point M* would lead to excess capitalism and to a social welfare deficits rendering those governments unable to meet their social goals. Hence, the optimal nationalization point M* in Figure 9 above again is more than just social protection, it is the point of effective social protection.

The search for the optimal level of nationalization in China

As mentioned in the introduction above, China appears to be allowing currently some levels of private activity involving assets of local relevance to little by little move towards a level of optimal nationalization while protecting assets of national relevance and keep political stability as its overall goal is still to meet its social/public goals, and the process of how China is doing that can be appreciated both ways, through a general asset inversegram and through a specific assets inversegram.

a) The optimal level of nationalization in China using a general assets inversegram

The general asset inversegram for China is shown in Figure 10 below:

Figure 10 above shows the following: 1) That China before opening its commons to private activity in assets of local relevance was operating at full level of nationalization at point (h) just as the Soviet Union did; and therefore China was operating at the point of full social welfare waste and total privatization deficits; 2) That since China now has started to allow some private use of assets of local relevance, it is operating at point (i) in terms of levels of privatization and between point (g) and point (h) in terms of levels of nationalization reducing the level of social welfare waste, but still at a private sector or privatization deficit at the space between (i) to (b) as China is still operating beyond the point of optimal nationalization at point (g) = M*, which is not efficient; and 3) That China in the future will allow privatization slowly to move from point (i) to point (b) to eliminate that social welfare waste and that privatization deficit associated with it, an efficient move as it coincides with the level of nationalization at point (g), which is the optimal level of nationalization(M*) as it meets its social/public goals.

See that at point (g) or optimal nationalization point(M*) in Figure 10 above, 1) There is not social welfare waste and there is no excess capitalism; 2) To the right of point (g) there is social welfare waste and privatization deficits; and 3) To the left of point (g) there is social welfare deficit and excess capitalism. In other words, as long as China can meet its social/public goals by operating at point (g) = M*, it will be able to efficiently allow private activity at point (b), which will help to keep the system as a whole stable.

However, Figure 10 above also permits us to see by the broken line from point (b) to point (d) that 1) If private activity in China is allowed to go beyond point (g) or to the left of point M*, slowly or quickly, it will be a point of excess capitalism, then China would not be able to meet its social/public goals as it would be operating at a social welfare deficit point; and 2) The bigger the social welfare deficit, the more unstable the China system would become. Therefore, China has a strong incentive to keep for sure private activity up to the optimal nationalization at point M* and avoid privatization beyond this optimal nationalization point M*.

b) The optimal level of nationalization in China using a specific assets inversegram

The specific asset inversegram for China is shown in Figure 11 below:

Figure 11 above allows us to point out in detail step by step how China is moving from full nationalization(line T) to optimal nationalization(line M*) to remain politically stable during the transition: i) Section “1” and section “2” show that China has decided to allow slowly the privatization of local assets(L) and it will continue to allow it until it reaches the point of optimal nationalization M* and avoid that social welfare waste and privatization deficit; and ii) Section “3” and section “4” indicate that after reaching optimality in the local assets privatization arena, China will have an incentive to privatize some national assets(N) up to the optimal point M* to avoid that social welfare waste and privatization deficit associate with national assets.

Notice that China is following the principle of inverse action, it quickly nationalized everything after the revolution starting from national assets to ensure system stability; and right now it is slowly allowing privatization starting from local assets to remain stable with the goal in mind of later privatizing some state assets. And also notice that when China started to allow privatization in 1978, then the following happened: i) China went from a communist country to a dwarf country(Socio-capitalist) and from a communist development system to a dwarf development system(Socio-economic) as now it has a compromised use model; and ii) China created a dwarf market(State controlled invisible hand).

General Implications of the discussion above

Nationalization policy should be used as a proactive optimal policy to ensure effective social protection while encouraging controlled capitalism, not as a reactive anti-privatization non-optimal policy as it has been used so far. This requires the nationalization of assets still in public use to place them outside the pulling forces of the private market; and the nationalization of private assets of national and local relevance.

Full nationalization is not an optimal point as it is affected by excess state/bureaucratic self-interest, leading to total social welfare waste and privatization deficits; and therefore, it is not an efficient social protection mechanism. Full nationalization should be avoided. as it is not sustainable in the long-run as shown by the fall of the Soviet Union.

Full privatization is not an optimal point too as it is affected by excess individual/corporate self-interest, leading to total excess capitalism and social welfare deficits; and therefore, it is not an efficient social protection mechanism too. Full privatization should be avoided. as it is not sustainable in the long-run as demonstrated by the recent excesses and crash of the financial system.

The optimal level of nationalization is an optimal compromised state and its goal is to ensure effective social protection, not just social protection.

The China experience shows that when moving from full nationalization to an optimal nationalization point, to remain politically stable, it should be done slowly beginning with the privatization of nationalized assets of local relevance first.

The principle of inverse action suggests that when moving from full capitalism to an optimal nationalization point, it should be done fast, beginning with the nationalization of assets of national relevance first.

The long-term viability of implementing optimal nationalization programs needs the creation of a world bank for optimal nationalization to assist countries with the financial support and expertise they may need to implement and ensure the success of such programs in the long-term.

Optimal nationalization theory is consistent with sustainability requirements.

Specific conclusions

First, it was indicated that the commons can be thought as existing in three different scenarios: fully in public use, fully in private use, and as a compromised commons. Second it was shown that the process of privatization and nationalization can be viewed as having different stages; that the nationalization process can be seen as the opposite of the privatization process or as privatization in reverse; that a level of optimal nationalization may exist at a point where nationalization meets social/public goals while allowing some levels of privatization; and that this is an optimal compromise state where social goals are met and controlled capitalism can take place.

Third, it was pointed out also that current empirical development experience of China appears to be consistent with the theoretical possibility mentioned above as by allowing little by little some levels of privatization in assets of local relevance, China is now moving towards a level of nationalization that will still allow it to meet its social/public goals while eliminating social welfare waste, and therefore China is moving slowly towards an optimal nationalization point or a point of optimally compromised commons right now. And finally, the general implications to other countries that are now moving towards or who will need to move away from the point of full nationalization or of full privatization were pointed out.

General conclusions

First, it was shown that nationalization can be expressed as privatization in reverse. Second, it was stressed that a possible optimal rate of nationalization exist; Third, it was shown that China is following the principle of inverse action when moving from full nationalization state towards the optimal nationalization point by slowly allowing privatization of assets of local relevance first; and finally, it was pointed out that nationalization policy should be used as a proactive optimal policy to ensure effective social protection while encouraging controlled capitalism, not as a reactive non-optimal policy as it has been the case so far.

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