Nationalisations don’t work
It is well-known that nationalising businesses or entire industries does not work.
Nationalising businesses or industries seldom proves successful. While it may be required during a crisis, such as Sweden's post-housing bubble intervention in the early 1990s, the government should typically refrain from meddling in private enterprises. However, nationalisation is once again a topic of discussion in several countries. A recent study serves as a warning about this approach.
In 1970, Chile elected President Salvador Allende and initiated one of the most extensive nationalisation programmes in a democratic nation. The study examined the financial records of 71 significant Chilean firms from 1967 to 1973, 32 of which were nationalised. The accompanying charts illustrate the impact of nationalisation on profitability (return on assets, ROA) and sales over assets for these firms.
On average, nationalised companies experienced an 11-13% decline in profitability and a 20% drop in sales over assets in the years following nationalisation.
This outcome is not unexpected. Numerous previous studies have demonstrated that nationalisations generally fail, with exceptions only in extreme situations like crises, where the government must act as a 'last-resort investor' in crucial industries. Surprisingly, such populist measures do not even garner support from the electorate.
In Chile's 1973 municipal elections, the coalition in charge lost between 1% and 4% of their vote share in municipalities with nationalised factories and businesses. These losses were not offset by gains in other regions.
In essence, nationalising businesses is detrimental to the economy, society, and the politicians who endorse such policies. Despite this clear understanding, the lesson often seems to be forgotten.
Written by urgent.news from Klement on Investing's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
