Nationalization

Government ownership of an industry or a formerly private company is known as nationalization. By far the more frequent of the two phenomena is government ownership of an industry. Although some authors, such as Lars Bengtsson, have argued that choice of industries is random, nationalized industries typically are those that government considers to be fundamental to national security (from oil to media) or national income (based on a natural resource that may also be a wasting resource), as well as those that are particularly attractive to foreign direct investment. According to Bengtsson, a nationalized industry can be viewed as a governmental hierarchy, whereas an industry with a strong governmental organization that buys, sells, and/or competes with private actors is called a governmental market system. The government can also govern a market with only private actors through regulations, via a regulated market system.

Amy Chua discussed a different class of nationalization in developing economies, wherein the purpose is discrimination against an economically dominant ethnic minority. Here, market processes of competition and rule of law are manipulated to benefit certain ethnic constituents and to disadvantage others; little or no attempt is made to justify this action in terms of socialist or communist ideology. She cited the ethnically targeted nationalizations and confiscations in postcolonial Burma, Indonesia, Kenya, Malaysia, Pakistan, the Philippines, Sri Lanka, Thailand, Uganda, South Africa, and Zimbabwe.

Although the primary focus of this entry is government nationalization of industry for issues of security, income, state building, or public policy, not nationalization to disadvantage an ethnic minority, the expropriation of private property is very often a consequence.

Precedents in International Law

In his study of nationalization in Latin America, David Schneiderman noted that constitutional rules once expressly enabled state intervention in the market to redistribute wealth through rules permitting the expropriation or nationalization of property, subject, for example, to the provision of “appropriate” compensation, which protected host country governments from the external pressures generated by foreign economic power. In the 1990s, this type of state capitalism fell into disfavor, and the countries of Latin America mostly abandoned the constitutional design mandating public control of the economy or enabling nationalization of key economic sectors.

Today, both expropriation of property and nationalization are prohibited unless they are for a public purpose, nondiscriminatory, and accompanied by the payment of “prompt, adequate, and effective compensation” that is fully realizable and transferable. This perspective is embodied in international law. In a famous case, the Iran-United States Claims Tribunal—created to resolve the crisis between the Islamic Republic of Iran and the United States arising out of the detention of 52 U.S. nationals at the U.S. Embassy in Tehran and the subsequent freeze of Iranian assets by the United States—it was found that property rights must be respected and that compensation must be paid when the alien owner of those rights is deprived of them by acts attributable to a state. Although a revolution does not by itself create liability, neither a revolution nor any other changed political, economic, or social circumstances can be [Page 1180]invoked to avoid liability for deprivation of an alien's property that is attributable to the state.

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