The Effects of Nationalization and Privatization of Business in South America

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NATIONALIZATION AND PRIVATIZATION OF BUSINESS IN SOUTH AMERICA 10

The Effects of Nationalization and Privatization of Business in SouthAmerica

Nationalization happens when a government takes ownership ofbusinesses formerly owned privately. The government may eithercompensate the owners of the business it takes or not. The oppositeof nationalization is privatization. Privatization regards to thetransfer of business control from the government to private owners,whereby government ceases to have control over the business.Nationalization and privatization happen for different reasons, indifferent ways and under different circumstances. Also, the processeshave both merits and demerits. In the following discussion, theresearch paper focuses on the effects of nationalization andprivatization of business in South America.

Nationalization of Business in South America

Over the years, nationalization of companies in South America hasswept across different countries and companies. Venezuela’sPresident, Hugo Chavez and Evo Morales, President of Bolivia havespearheaded nationalization in South America. In 2002, Chavez passeda Hydrocarbons Law, which followed the nationalization of all oilmanufacture and distribution in Venezuela (National Geographic,2016). Morales government has taken control of the country’snatural gas as well as oil production. In addition, he took over thewater distribution rights of French Company in La Paz capital(National Geographic, 2016).

Governments use different approaches in nationalizing companies,which range from complete take-over to owing a percentage of thecompany. Some illustrations include nationalization of businesses inVenezuela, Argentina, Ecuador, Bolivia and Guatemala as depicted infigure 1 (The Globe and Mail, 2012). It may also happen viathe transfer of a business’s assets to the government where itoperates, or via share capital transfer. A company that transfers itsshare capital to the government continuous to run the business, butunder state control.

Figure 1

The reasons for South America’s nationalization are for governmentto improve capital and promote economic growth. In the 1950s as wellas 60s, many South American nations began to nationalize their majorindustries with an objective of improving capital (EnergyInformation Administration, 1997). To date, several SouthAmerican countries have nationalized business, like oil productionand electricity, to promote economic growth. For example, coppermines were nationalized in Chile in 1971. Prior to governmentownership, the industry was under the control of foreign companies.Currently, CODELCO, Chile’s “National Copper Corporation” isthe largest globally, accounting for above 12.1 billion dollars ofsales as at 2009 (National Geographic, 2016).

The effects of nationalization are both positive and negative. Anadvantage is that it improves the lives of civilians by reducinginequality, especially for the poor. For instance, following thenationalization of electricity in the 1950s to the 70s, more peoplewere able to access electricity. Research shows that at the start ofthe 1950s, close to 30% of South Americans could access electricity(Energy Information Administration, 1997). As the 1970s werecoming to an end, 70% of the country had electricity (EnergyInformation Administration, 1997). Assets that result in majorwealth production, like electricity, have the capability to createwealth inequalities. This is because under private ownership theybecome monopolies. However, nationalization aims at ensuring that thewealth is distributed and benefits all citizens in the country.

Most research associates nationalization with disadvantages. In the1950s, 60s and 70s, government control of electricity benefitedArgentina. However, in the 80s, the country faced a debt crisis,resulting in operational inefficiency. Due to reduced governmentspending, it was no longer possible for the state to support theelectricity industry (Energy Information Administration,1997). Electricity, which was previously accessible to civilians, wasnow experiencing operational inefficiencies. The act ofnationalization limited foreign direct investment into the sector. Asa result, government was unable to continue investing in theelectricity sector.

Nationalization results in too much control by government, whichcould result in the collapse or loss of a company. An illustration ofhow excessive government control has led to a decline in cash flow isin the case of “Petroleos de Venezuela, PDVSA”. Venezuela’s oilindustry began to thrive in the 1940s and was nationalized in 1974(Noriega &amp Trigos, 2013). PDVSA became successful followinggovernment ownership due to access of foreign capital as well asadvanced technology. The company was able to compete globally withsimilar companies in Europe and America.

Oil represented 95% of the state’s exports prior to Chavez’selection (Noriega &amp Trigos, 2013). Once Chavez became president,he brought PDVSA under leadership of political loyalists. Through thenew management, he used revenues from the company in funding hisdomestic expenditure. In 2002, following a workers strike, Chavezfired employees that were key to the success of the company (Noriega&amp Trigos, 2013). Currently, PDVSA is highly politicized and itsrevenues are used to fund government food programs and conductmalicious transactions. As a result, oil production in Venezuela hasdropped from 3.3 million barrels daily prior to Chavez’s presidencyto 2.4 million (Noriega &amp Trigos, 2013).

Nationalizing business weakens the motivation for overseas nations toinvest in most South American countries. Foreign investment isimportant in boosting the economy of nations. It ensures that acountry has the needed technology and manpower, obtained fromoverseas companies to aid in production. However, lack of foreigninvestment results in production losses with time, as many countriesare incapable of replacing the investment endeavors of foreigncompanies.

Privatization of Business in South America

Privatization in South America thrived in the 80s and 90s. Manypublic resources, such as telecommunication organizations, transportand water management structures were sold to private investors. Thisresulted in increased revenue for the countries from privatizationsales as is depicted in the chart below (The Economist, 1997).

There are different reasons why some South American countries decideto privatize. In the 80s and 90s, privatization was inspired by therequirement to improve government’s accounts. In the 1980s,ineffective management, political exploitation and corruption hadmade state owned companies a liability (The Economist, 1997).Another reason is to boost economic growth. For instance countrieslike Chile have privatized their telecommunications sector, which hasbecome a major driving force towards the economic growth of thecountry (Lectric Law Library, 2015). Hence, there is a demandto improve such infrastructure, which is achieved throughprivatization.

Different approaches are employed in privatization of business. Itcan happen through the sale of a specified percentage of a company’sstock. An illustration is the privation of Argentina’stelecommunications sector in 1991 via the selling of 60% stock(Lectric Law Library, 2015). Another approach is therestructuring of companies, like Argentina’s ENTEL, which wasseparated into two organizations. The two approaches used inArgentina have also been used in Bolivia, Chile and Colombia (LectricLaw Library, 2015). A third approach used by countries toprivatize is the awarding of concessions. This has been practiced inColombia, which is currently in the process of privatizing itsTelecom Company (Lectric Law Library, 2015). In each of theseapproaches, private companies are expected to meet some conditions.For instance, the companies that manage to get concessions fromColombia will be expected to work on a contract for 10 years. Thecompany given the concession will also be required to pay Colombia’sgovernment a yearly fee of 2% of the company’s gross earnings(Lectric Law Library, 2015).

Privatization can either have negative or positive effects on acountry. One of the advantages is that it generates revenue forgovernments, which can be used in improving the lives of civilians.Private companies, unlike government owned companies, have to paytax. Hence, countries are able to generate revenue from the tax paidby private investors. Tax money increases the revenue of a country.Research shows that in countries such as Argentina and Bolivia,companies that have been privatized are the major taxpayers (Checchi,Florio &amp Carrera, 2005). Such revenue can be used by governmentsto improve infrastructure, for instance building better schools andhospitals, which in turn improves the welfare of citizens. Statesalso make money from the sale of stocks to private investors. Forinstance, Argentina received 1,672 million dollars for selling thecompany (Lectric Law Library, 2015). Peru received 2,002million dollars from “Telefonica de Espana”, who bought thetelecommunications service from Peru (Lectric Law Library,2015).

Privatization improves a country’s infrastructure. When privatecompanies take control of services such as telecommunications, theyimprove the services. This is because, private companies, especiallythose that are international bring in their advances in technology.Such development has been witnessed in Chile. The country privatizedits “Compania Telefonos de Chile” resulting in the transfer ofownership to private sector organizations (Lectric Law Library,2015). As a result, the development of the communication industry inthe country has been very triumphant. Currently, Chile is among thenations, which export their knowledge and are also investing inoverseas countries.

One of the disadvantages of privatization is that it may result innatural monopoly. This happens when there is only one firm in anindustry. For example, electricity is most likely to be provided by asingle firm. Privatization of the private sector results in thecreation of a private monopoly. The monopoly has the freedom ofsetting prices due to lack of competition, and could exploitcustomers by setting high electricity prices. Another disadvantage isthe loss of company dividends. While governments receive a lot ofmoney from the sale of a company, they lose dividends. Once a companyis sold to private investors, it becomes the property of shareholderswho take over the dividends. As a result, a country loses the moneygenerated from dividends.

Conclusion

Nationalization and privatization are measures taken by governmentto either regulate the ownership of companies, or transfer ownershipto private investors respectively. I think that when a countrydecides to nationalize companies the government benefits more thanthe civilians. This is because a government maintains full control ofthe business and has the power to use the revenues from nationalizedbusiness as they desire, which results in too much control.Politicians may thus use their powers to steal from a companyeventually resulting in its loss. Nationalization reduces foreigndirect investment. Such investment benefits a country because themoney can be used in development projects that benefit the civilians,like building schools and hospitals. On the other hand, privatizationresults in more benefits for the civilians of a country. Privatecompanies pay taxes to governments, which is used to improve acountry’s infrastructure. Private companies bring in theirknowledge and technology to a country, which also results ininfrastructure development. I think that countries should focus moreof privatization instead of nationalization. They should onlynationalize business sectors that are not after money making, likehealthcare.

References

Energy Information Administration. (1997). Electricity reformabroad and U.S. investment. New York: DIANE Publishing.

The Globe and Mail. (2012). Nationalization in Latin America.Retrieved from:http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/nationalization-in-latin-america/article4409002/

Noriega, R. F &amp Trigos, F. (2013). Latin American energymonopolies: Boom or bust? American Enterprise Institute, 1-1.

The Economist. (1997). Business in Latin America: A very bigdeal. Retrieved from: http://www.economist.com/node/107782

Lectric Law Library. (2015). Privatization in South America.Retrieved from: http://www.lectlaw.com/filesh/il-2.htm

Checchi, D., Florio, M &amp Carrera, J. (2005). Privatizationdiscontent and its determinants: Evidence from Latin America.Institute for the Study of Labor, 1-46.

National Geographic. (2016). South America: Human geography,1-1.