Socialist Serenade

From Venezuela to Northern Rock, nationalization is rearing its ugly head, though history teaches us it almost always ends badly.

Story Highlights:

  • Venezuela has nationalized cement and steel, joining telecommunications, electricity, and oil under state control.
  • Chávez wants to boost political support and government revenue, but his efforts will likely fail because nationalized industries fare poorly.
  • Capitalistic states face similar dilemmas over nationalizing failing banks during the so-called credit crunch.


Pop quiz: What's the easiest way to poison markets? Government intervention! New developments in Venezuela are ominous for their already battered economy. No, not their banning of The Simpsons, though we are decidedly opposed to discriminating against the four-fingered. Rather, we believe a fresh wave of nationalization will prove toxic. And unfortunately, the nationalization bug isn't fully contained.

Chávez to Nationalize Ternium Unit
By Joel Millman and Darcy Crowe, The Wall Street Journal

Venezuela is currently the chief offender, with the government already controlling telecommunications, electricity, and oil. Now cement and steel are being nationalized. Globally, it's rare for nationalized industries to succeed long-term, yet Chávez, defying centuries of evidence, states expelling foreign multinationals will be profitable.

This is nothing more than a political move. As popular support for Chávez has flagged recently amid accusations he's reneged on previous promises, he can position his government as "saving" Venezuelan workers from indentured servitude and exploitation. Nationalizing industry lets him seem like he's fighting for the proletariat, rallying support for November's elections. Steel company Ternium-Sidor makes a convenient target because of their frequent clashes with Venezuelan tax authorities. But Chávez will likely be sorely disappointed if he's after Ternium's profits. Nationalized industries often stagnate if not crumble. Investment in innovation and improvement disappears as states maximize short-term profits. Industry declines, economies suffer.

Even worse, when a nationalized industry fails, it's a nationalized crisis! When Britain's nationalized coal industry declined in the early 1980s and the government closed pits and cut jobs, the ensuing miner's strike threatened to unravel economic and political stability in the UK. Had coal been a private enterprise, shareholders might have suffered, but the ramifications would have been otherwise limited. Or the industry might have been flat out run better!

Similar problems plague Mexico today, as state-run oil monopoly Pemex disintegrates.

State Oil Industry's Future Sets Off Tussle in Mexico
By James C. McKinley Jr., The New York Times

Venezuela: Take notice. Mexico failed to invest in exploration, refining, and infrastructure. Now supply is dwindling, pipelines are crumbling and gasoline must be imported. Yet there's plenty of oil available! Like the thirsty guy adrift in a raft at sea, their aged technology is just insufficient to tap offshore oil fields. President Calderón wants a boost from private investment, but labor leaders are rallying the proles against privatization, causing labor unrest and demonstrations in Congress. Perhaps swayed by ideology, people assume privatization equals neo-colonialism, and they would rather suffer economically than lose sovereignty. Plus, failing though it is, Pemex is a symbol of national pride—they believe its death would harm their identity.

But unfortunately, nationalization isn't restricted to socialist states—it's materializing in capitalistic countries in the wake of the so-called credit crunch. Iceland may nationalize ailing banks, and the UK nationalized Northern Rock after the run last year. (Interestingly, Bear Stearns wasn't nationalized but many errantly believe the Fed's role in JP Morgan's acquisition came close.) Nationalization received popular support from those who believed the failure of these institutions would sound the death-knell of capital markets. Saving capitalism through socialization . . . who knew?!

Though nationalization moves in Iceland, Britain and elsewhere don't even approach government ownership of an entire industry, the ramifications remain. Once any entity is nationalized, reversing course is difficult. South Korea has yet to divest banks nationalized during the Asian Contagion, and the British are worried Northern Rock will be an albatross for decades.

Remember, stocks abhor government intervention in capital markets. Corporate failures may hurt in the short-term, but the effects are mitigated in the long run. Firms blowing up is nature's way of saying, "Hey! You took too much risk! Don't do that again!" and is quite healthy for industries, markets, and economies. Nationalization only guarantees problems drag indefinitely and industries die a slow and painful death. So let freedom ring!

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.