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E-MailAlissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico.
Arguably the single most awaited economic event of 2019 was the public listing of the Saudi national oil company, Saudi Aramco, which swiftly became the largest listed company globally, overtaking Apple. Only half a year later, the privatisation of any state-owned company appears unthinkable. Indeed, the privatization mantra that has underpinned liberal economic thinking and policy guidance of multilateral institutions since the 1980s, has come to an abrupt, yet firm halt.
Over the last week, we have witnessed exactly the opposite tendency take hold all over the world and most notably in Europe—most hard-hit by the current pandemic—as governments in Spain, France, and the UK have rushed to announce nationalizations. Faced with a choice of lending to or investing in failing national champions, a number of governments have opted for the latter, nationalizing airlines, hospitals, automotive firms and other “crown jewels”.
If the pandemic persists, these one-time decisions will beckon comprehensive nationalization programs in the coming weeks. As corporate debt markets have dried up, with already exorbitant borrowing of $2.1 trillion USD last year by non-financial corporations and $4.4 trillion USD coming due in the next 3 years according to OECD estimates, governments—following the German example—will have no choice but to go on a borrowing spree to finance this investment bonanza, piling up even more sovereign debt.
An obvious, yet erroneous, comparison to this wave of nationalisations being drawn is the last financial crisis, whereby governments—notably in the US and the UK—were forced to rescue primarily too-large-to-fail financial institutions. However, that was then and this is now: the nature of firms being rescued is not the same, the geopolitical order has changed, trust in governments has waned, while sovereign and corporate debt has skyrocketed.
Whereas national investments forced by the last financial crisis were primarily in the financial services sector and were generally not in the form of full-scale nationalisations, the tidal wave we are witnessing today is neither limited to financial institutions, nor is aimed to merely prop-up ailing companies with a view to rapidly divest. At this juncture, it appears rather unfathomable that governments will be able to dispose of these assets in the short or medium term.
One of the most significant structural implications of planned nationalisations of companies—either insolvent ones such as Alitalia or else strategic as hospitals in Spain—will be a growing competition among state-owned firms, as many of these firms operate cross-border. The airline sector, where national champions are already prevalent, offers useful a preview of this dynamic, with the longstanding war between American and Gulf-based carriers over claims of unfair competition by the latter.
The level of state ownership was in fact rising globally even prior to the current pandemic, with the growth of various sovereign wealth and development funds, whose assets under management have ballooned over the past decade. The government is the second largest shareholder even in the listed companies, with 14% stake globally. At the same time, assets under management of large private institutional investors—notably the Blackrock, Vanguard and State Street “trio”—have already been slashed as a consequence of the crisis.
Only weeks before the pandemic, the Dubai government has announced the delisting of Dubai Ports—the largest company listed on the local exchange—to bring it back into the fold of the state. And while the neighbouring Saudi Arabia has disposed of a nominal stake in Saudi Aramco, it has recently established new state-owned firms in healthcare, entertainment and other sectors to support national prerogatives.
In the coming years, governments are likely to follow this path in specific sectors, notably in agriculture, where national food companies are springing up to cater to food security objectives. While it is premature to suggest the disruption of the food chain as a result of covid—if it were to materialize—food companies may be a subject of the next wave of state investment, albeit with a different rationale.
The medical supplies sector, which is becoming the source of unravelling diplomatic warfare globally, amid recent allegations that the Czech Republic diverted masks destined to Italy from China, could be the next in line. The current breakdown of the global multilateral order, exemplified by the American administration’s offer to purchase a German medical supplies company, may lead to greater reliance on “national champions” unless the pandemic is rapidly contained.
Governments will go to greater lengths to protect strategic companies, while the definition of “strategic” may be subject to varying interpretations, as highlighted by the French declaration of its dairy company Danon as such to prevent its acquisition by Pepsi in 2005. Already, Spain has introduced investment restrictions, forbidding non-EU investors to purchase more than 10% of any strategic company, a measure that only 2 weeks ago would have caused backlash. The introduction of poison pills to protect companies from being overtaken by foreign competitors is also back on the table.
The liberal economic mantra that has underpinned the current multilateral system risks having the carpet abruptly pulled under its feet. This is not without consequence as this philosophy has underpined the economic modus operandi in developed markets since the second World War and has also been for at least four decades the medicine also given to developing countries by the World Bank, the IMF and other IFIs.
Incidentally, the sudden growth of state ownership is occurring at a time when the global multilateral order is at a pitchfork, with the intensifying geopolitical war between the United States and China. The United States’ unilateral closure of borders with Europe and the shift of its focus inward to address its own pandemic, may weaken its role in the global economy going forward, as already predicted by some commentators.
On the other hand, the role of China may witness a resurgence if it is able to credibly deal with its coronavirus epidemic, while extending a helping hand to ailing Europe. To an extent, this is already happening as China us going on a charm offensive with its own narrative about the origins of covid, while offering medical supplies to European countries, shaken by lack of regional solidarity. In this scenario, as the virus spreads to other continents, China’s influence over African and other countries, might increase in tandem.
The counterparty of China’s assistance will be countries’ participation in the Belt and Road initiative and, possibly, their acceptance of the Chinese economic model. If one is to conjugate a possible resurgence China Inc with state capitalism in other emerging markets, this last wave of nationalisations in developed economies—while justified—may risk being the last nail in the coffin of the liberal economic order.
