Partnerships in Namibia and Botswanna between mining companies and the government have seen little decrease in foreign investments. The private sector handles the funding and operations of the mining industry, while the government regulates manufacturing while remaining in control of the mineral resources.
Nationalizing the mines could, in the short term, make South Africans better off on the whole. If ownership of the mines is turned over to the state, future profits and current assets of the industry could be used towards creating news jobs, and providing more state services for the betterment of the South African people. With ownership of the mining industry turned over to the public sector, investors and businesspeople of the private sector previously involved in mining would be able to focus their efforts on other industries.
More attention from the South African private sector to these industries would make them more wealthy and competitive on a domestic and global level. It could lead to better financial security for South Africa. A shifted focus of the private sector towards other South African industries will make them more appealing for foreign investors, leading to a diversification of foreign investments and South African assets.
If nationalization follows the same path as Namibia and Botswanna with little decrease to foreign investment in mining, the overall result could be a significant increase to South Africa's overall wealth. The market value of the property. The extent of direct state investment and subsidy in the acquisition and beneficial capital improvement of the property. The purposes of the expropriation.
These factors might lower the amount of compensation below the current market value of the relevant firms. However, in the case of South African mines these considerations would offer little scope for a large wedge between compensation and market values. The reasons are as follows:. South African mines are currently operated under competitive conditions that drive them to attain considerable efficiency.
There is little incidence of mines being held simply for speculative purposes. There is a separate legal process for people who were forcibly removed from their land during Apartheid, rendering this consideration of little relevance to the nationalization of mines.
There is little recent history of net subsidy or other direct support to the mining sector. As argued below, the nationalization of mines will not achieve any pressing social need, which renders that consideration irrelevant as far as the calculation of compensation is concerned.
The South African government has signed a number of international investment treaties by which government has committed itself to full compensation in the event of expropriation Keeton and White, This is relevant given the international composition of the mining companies' shareholders. Finally, the shareholders of South African mines include large public and private sector pension funds. Any nationalization without compensation would pass the cost of nationalization on to current and future pensioners in all sectors of the economy.
Nationalization of South African mines would represent a major change in the role of the state in the local economy. From the international experience there does not appear to be any one level of state participation that yields predictably better outcomes in terms of economic development Commission on Growth and Development, There are certainly examples, especially from East Asia, where government seems to have played a supportive role in the rapid industrialization of countries like Korea and Singapore.
But there are many more cases especially in Latin America and Africa where government intervention held back economic development Tanzi, ; Easterly, On this topic, a 'Developmental State', and the potential for nationalization of the mines to promote that agenda is an important part of the policy debate ANCYL, , for example: paragraphs.
The concept of a 'Developmental State' is not an economic one and has been imported to the sub-field of 'Political Economy' where nonmainstream economists in particular use it. While it is not a theory in the usual sense of that word, the concept typically refers to a government that takes an active and leading role in the economic development of a country.
The East Asian success stories of the post-war period provided the examples upon which this literature developed. Whatever the 'Developmental State' means, though, it has not been associated with a strong case for nationalization, or even large state ownership of productive assets. Caldenty's summary of key characteristics of 'Developmental States' included the following:.
Rather, the developmental state tried to achieve its goals through a set of instruments such as tax credits, breaks, subsidies, import controls, export promotion, and targeted and directfnancial and credit policies instruments that belong to the realm of industrial, trade, andfinancialpolicy: Caldentey, , p. In the South African literature, proponents of the Developmental State concept such as Turok have emphasized the capacity for planning, the boldness to take decisive policy action, and the democratic nature of the 'Developmental State', but not state ownership or nationalization.
And the Commission on Growth and Development, which studied the common features of the 13 post-war growth success stories, also warned against a preoccupation with the size of government to the detriment of a discussion about the effectiveness of government Commission on Growth and Development, , p.
While the Commission recommended that government take an active part in the process of economic development, their advice was not sympathetic to nationalization.
Instead they recommended a risk-management approach to policy-making, which entails small policy adjustments that would allow reversal if the results are undesirable Commission on Growth and Development, , p. Neither this result, nor the 'Developmental State' literature, provides support for the proposed nationalization of a large sector, such as mining in South Africa. The absence of a strong justification for nationalization in development economics demonstrated above is reflected in the research agenda of economists more broadly over the last twenty years.
A generation ago, readers of the first edition of the New Palgrave Dictionary of Economics found an insightful essay on nationalization by M. Posner , with cross-references to entries such as privatization, public utility pricing, and socialism.
Twenty years later, only an essay on privatization by John Vickers appeared in the massively expanded second edition of the New Palgrave, with nationalization nowhere to be found. In South Africa, the policy debate followed a similar trajectory see, e. To understand the debate that has since emerged in South Africa one needs to look beyond the development literature to a small body of literature that lists uncontro-versial empirical results of broad generality or stylized facts that are correlated with the succession of nationalizations and privatizations in the post-war era, for example Chang et al.
The following stylized facts drawn from this literature are relevant to the local debate:. Firstly, that nationalization occurs much more frequently in the natural resources sector and in utilities than in other sectors of the economy.
Secondly, the occurrence of nationalization in the resources sector is positively correlated with the real price of these commodities: high commodity prices have been associated with nationalization and low real prices with privatization.
Private natural resource companies typically operate with contracts that allow them to appropriate the windfalls from commodity booms. And these windfall profits encourage governments to consider nationalization. The integration of commodity markets internationally brings about waves of nationalization - these are often common to several countries at the same time.
Reading these four facts together gives us one possible explanation for the local policy agenda and the observed rise of nationalizations in the resources sector in Latin America in recent years.
This is not to deny that President Morales in Bolivia and President Chavez in Venezuela have ideological arguments for nationalization. The argument is, however, that these ideological arguments find fertile ground when commodity prices are higher, as they have been in recent years, and the proposal then follows to nationalize those companies that are perceived to enjoy unfair windfalls from a commodity boom.
Venezuela and Bolivia also share a fifth stylized fact identified by Chang et al. These stylized facts can now be combined to understand the local debate on nationalization: fiscal and distributional claims have dominated the local discussion. The ANCYL plan of May for nationalizing the mines, for example, argues that the massive poverty challenges, unemployment and unequal spatial development realities call for an urgent focus on mineral resources' ANCYL, , par.
In democracies, it is not enough to propose a policy, you have to win electoral support for it. At this point, Duncan's demonstration that natural resource expropriation has been more likely under democracies becomes relevant, and Pint argued that the explanation for this lies therein that the beneficiaries of nationalization are often concentrated, notably organized labour, while the costs are diffuse and shared by current and future taxpayers.
In a democratic system, there is therefore a policy incentive to pursue nationalization, possibly sacrificing longer-run economic efficiency for short-run political benefits. Unsurprisingly then, resource nationalization has also been more common in countries where the economy, and hence the tax base, are heavily reliant on one or a few commodities Kobrin, ; Minor, In these cases the beneficiaries of nationalization might be more powerful politically. The explanation for the current debate in South Africa offered in this paper is, therefore, as follows: the background is the high level of income and wealth inequality in South Africa Leibbrandt et al.
Add to this a few years of higher commodity prices and the perception that the windfall from these prices had been distributed such that inequality was not lowered and may have increased, together with a democratic political system where a populist leader can mobilize support to serve a majoritarian goal, and we have the South African debate on nationalization.
Why ownership of corporations matters. The proponents of nationalization have not suggested that the economy will reap great efficiency gains from nationalizing the mines a traditional justification for nationalization. Instead, and consistent with the influence of high commodity prices, the supporting arguments have been largely fiscal and ideological. The fiscal consequences of nationalization, therefore, require a central place in the discussion of potential consequences.
It is ironic that both nationalization and privatization can be motivated by the desire to improve public finances. Proponents of privatization aim at lower government debt with an associated lower interest burden on the budget and, in the case of loss-making public enterprises, a reduction in government expenditure.
The argument is that privatization frees up fiscal resources that will, subsequently, be available to pursue government's many other goals. Proponents of nationalization might also envisage greater fiscal scope as a consequence of the policy. Their argument is that the public sector's revenue from nationalized firms might exceed the tax revenue from private firms by a sufficient margin to compensate for the costs of nationalization.
In such cases nationalization would increase fiscal resources. To judge the likelihood that nationalization will be a fiscal burden or benefit, the following factors have to be taken into account.
Government's cost of finance, since nationalization is typically financed through government debt. The post-nationalization financial performance of the firms, which is influenced by the goals and incentives for the nationalized firms as well as the particular industry at stake.
Government's cost finance is a determined by a number of factors, including: the size of the existing stock of public debt; recent changes in the public debt surpluses and deficits on the national budget ; government's track record, especially on inflation; and the timely payment of debt.
It follows that governments with low debt and a credible record in macroeconomic policy have a better chance to finance nationalization at comparatively low interest rates, except in cases where the cost of nationalization is itself large compared with the existing debt stock.
The proposal to nationalize the mining sector in South Africa is an example of the latter case, where the state has relatively little debt at the moment and a credible fiscal and monetary track record, but where the cost of nationalization will be so large the details are worked out later in this paper as to impose a considerable financial cost on government.
The second factor that will determine the fiscal impact of nationalization is the post-nationalization financial performance of the relevant firms. The performance of a firm is driven by many factors, not all of which will be affected by the change in ownership implied by nationalization. However, three important factors will be affected, they are: the goals of the firm, the monitoring of corporate performance, and the speed and intensity of feedback on corporate behaviour.
Starting with the firm's goals: it is conceptually difficult to define the goals of nationalized firms: in some ultimate sense the public owns these firms, but in practice the public's goals are ill-defined and often contradictory. Is the public interested in the highest net worth for the nationalized firms, or perhaps alternatives such as distributional goals or maximum employment?
There are difficult trade-offs to be managed here, for example between productivity and the pursuit of equality Sinnot et al. Public Choice 2 authors have also identified the many factors other than the public's goals that are likely to influence the decisions of managers at the nationalized firm, including political considerations, the influence of lobbyists and other special interests, the difficulty faced by the public to write 'complete contracts' for the managers, and many more Schleiffer, ; Vickers, Not only are the goals different for public firms, but so too are the mechanisms that monitor the behaviour of public sector managers Alchian, There is no possibility for shareholder oversight with the intensity experienced on financial markets, nor the ability to tie managerial incentives to stock market performance, as an external assessment of the company's performance.
Finally, there is no threat of takeover in the public sector, a threat which disciplines agents in a competitive private sector.
Mentioning potential takeovers touches on the feedback mechanism that encourages good behaviour and discourages poor corporate decisions. Apart from sidestepping the threat of takeovers, public sector managers are also not disciplined by the threat of bankruptcy. The repeated bailouts of large state-owned enterprises in South Africa in recent years are a familiar demonstration of the 'soft' budget constraints that frequently arise in these cases.
To summarize these points, managers of a nationalized firm face different and less clearly defined goals, are monitored differently and possibly less effectively, and face slower and weaker feedback when they act inconsistently with the public's goals.
For these reasons, the nationalized firms are likely to be less efficient from an economic perspective and, hence, more likely to be a fiscal burden. This likelihood rises the more competitive the private industry was prior to nationalization. Nationalizing a competitive private industry is likely to lead to less efficient public firms after nationalization, and a greater likelihood that the nationalized firms will be a financial burden for government.
Although this is a theoretical result, we will see its empirical echo in the discussion of nationalization's track record. The current turmoil in the European Union shows the importance of the fiscal consequences of nationalization. It is also important for the additional reason that government's budget is the main vehicle of redistribution in most countries, including South Africa. Of course, it is possible for the nationalized firms to pursue distributional goals on a limited scale, by for example cross-subsidization schemes or softer employment policies Vickers, But the net financial benefit of nationalizing the firms will affect government's ability to pursue all its goals, including the social assistance by which government provides effective poverty relief and redistribution to Finally, Biais and Perotti have argued that the choice between state or private ownership will not just affect the outcomes of productive activity, but also shape society's political incentives.
Widespread private ownership encourages the public to support the institutions of private property and contract rights that support specialization and market co-operation, the two key features of rising prosperity identified above.
Conversely, state ownership creates dependence on government and lowers the support for these key market institutions. From this perspective, one of the adverse long-term consequences of nationalization is that it undermines the support for market institutions. The track record of nationalization.
Controversy over the track record of nationalization is a notable feature of the current South African debate; for example, an ANC task group studied the outcomes of nationalization as well as different models of nationalization internationally.
The outcome of this research was published early in ANC Policy Institute, and was based on the assumption that a careful enough study of particular cases will reveal the contribution of nationalization to subsequently favourable or unfavourable outcomes 3. It is an assumption that is very widely held, but leaves the analysis with two related and serious shortcomings.
The first problem is that these cases studies cannot isolate the particular effect of the change in public ownership from the many other changes that are necessarily occurring in any actual historical case. From this follows the second problem inherent to the case study methodology, i. To identify the outcomes of nationalization from real world examples, we need to look beyond individual cases to answer the question as formulated by Sam Peltzman 40 years ago; we wish to discover the following ' When we observe the outcomes of nationalized coal mines in the United Kingdom we do not know how much of the outcome to attribute to i the evolution of the coal market, which is a function of global forces, as opposed to ii developments elsewhere in the British economy, including iii the labour movement, iv the efficiency of the public sector, and of course, v the impact of nationalization.
In addition to the two methodological problems discussed above, a third difficulty is that certain firms are prone to be nationalized while others are likely to be in the private sector Meggison and Netter, In industries where market failure is serious and frequent, we have a prior expectation to find public ownership of the firms or single firms.
So-called natural monopolies are an example. This challenging problem is not relevant in the case under consideration though, as the mining sector in South Africa shows none of the features of a natural monopoly. In fact, competition is robust not just locally, but across international borders. The challenge of identifying the separate impact of nationalization remains though and cannot be answered through case studies.
One approach to this problem is to identify 'natural experiments', i. To make this less abstract, consider the 35 publicly funded and 53 privately funded expeditions to the Arctic between and studied by Karpoff He was able to show that the differences in outcomes were not due to different goals, technology, or nationality. Instead, large differences in performance measured as the number of major scientific discoveries, the absences of accidents or deaths, and the health of the participants were observed along the private-public division of expeditions, with the private ones doing much better.
What is more, the public expeditions had the advantage of better funding. Since the transport sector has often been a target of nationalization on public-goods grounds, it is instructive to consider an industry-specific study of international airlines.
Ehrlich, Gallais-Hamonno, Liu, and Lutter investigated the consequences of state ownership for productivity growth and cost increases in 23 international airlines. They found a productivity penalty of 1. While natural experiments are a powerful solution to the challenge of identifying the counterfactual, such studies are necessarily limited to very specific circumstances.
More general investigations are possible but in these cases we need data sets with variation across institutions, time, and countries or regions and this is where the nationalization literature dries up. Fortunately, we can deduce some answers from the much larger literature on the consequences of privatization Meggison and Netter, , provide a thorough review of the evidence. While one might object to the narrowness of the Ehrlich et al.
While these papers do not all measure the same proxies of efficiency, they all find that, after controlling for size, market share, and other firm-specific features as well as macroeconomic features that might impact on the selection of ownership, the private firms are significantly more profitable and, where measured, more productive than either mixed or outright state-owned enterprises. Do these results hold for developing countries, especially those where the government is suspected of playing an active and positive role in industrial policy as suggested by the 'Developmental State' theory?
In short, yes. Chinese state-owned and mixed enterprises are less productive than comparable private firms, as found by Tian , and the same was found for Indian firms by Mujamdar and Chong and Lopez de Silanes for a cross-section in Latin America.
These results are consistent with the claim that nationalization is more inefficient the more competitive the private industry was prior to nationalization, but this claim was studied explicitly by Kole and Mulherin using another natural experiment. They studied the outcome of 17 American firms with substantial Japanese and German ownership at the outset of World War II that were nationalized for security reasons by the US government.
The US government acted like a passive investor, leaving the goals and management structures as before, partly because government wanted to optimize the value of the firms with an eye towards later re-privatization, which did occur.
After controlling for industry-specific features, Kole and Mulherin showed that these temporarily nationalized firms performed no differently on efficiency and profitability measures than their private competitors. Not only did these firms operate in competitive industries, but Kole and Mulherin argued that they were left to compete like private firms.
The cost in terms of efficiency enters when the nationalized firms starts to operate with different goals and less competition than their private sector predecessors. An alternative to the empirical or historical and statistical approaches described in the preceding paragraphs is to examine the preconditions for successful nationalization to determine whether a particular industry would be a suitable candidate.
The critical issue in an investigation of this kind is to determine whether markets will function tolerably well in the particular industry given the usual complement of market regulations. Markets can fail when there are very large economies of scale or large externalities, which are costs or benefits associated with a particular activity, but not internalized in the cost of that activity.
Africa Today podcast. This video can not be played To play this video you need to enable JavaScript in your browser. South Africa's deputy president Kgalema Motlanthe: "There's a property clause in the constitution which must be respected". Image source, AFP. Julius Malema has long advocated a programme of nationalisation. Published 1 March Published 30 April Published 21 September
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