Productivity, Nationalization, and the Role of “News”: Lessons From the 1970s

Abstract

Occurrences of an old phenomenon, the expropriation of foreign-owned property, peaked in the 1970s when virtually every significant oil-producing developing country nationalized its oil. Nationalization was again on the rise in the 2000s. Using novel data, this paper quantitatively evaluates the effects of nationalization. First, the paper finds significant productivity losses associated with nationalization in a sample of oil-producing countries. Venezuela in particular experienced a striking decline in productivity. Second, the paper presents a new channel through which nationalization affects productivity: a long-term pre-announcement can shift the composition of the workforce with a huge decline in highly skilled foreign workers and result in higher extraction and lower exploration. Guided by a quantitative dynamic partial equilibrium framework disciplined by features of the Venezuelan data, this paper then evaluates the effects of nationalization. A comparison of the simulated and time series data shows that the model can explain about 80% of the productivity pattern over 1961–1980 in the Venezuelan oil industry. Counterfactual experiments suggest that the shift in the composition of the workforce is important in accounting for the productivity pattern. Furthermore, if nationalization had been sudden, long-run losses would have been lower.

Oil nationalisations as protracted affairs: evidence from Venezuela

“…Our main hypothesis is that international oil companies perceived the 1958 shift in leasing policies not as a mere threat of nationalisation by the Venezuelan government, but rather as an 'early notification' and adjusted their time horizon accordingly. A similar claim is advanced by Cakir-Melek (2014) who uses data on the Venezuelan oil industry to calibrate a dynamic model of a representative foreign firm and simulate the response to 1961 'news' that a nationalisation was expected to materialise by 1970. The model predicts that foreign firms would increase extraction effort and reduce exploratory efforts in anticipation of nationalisation, although no indication is given as to how firms came about such 'news' and the adjustment predicted by the model is slower than what is actually observed in the data.…”

Optimal nationalization policy in a heterogeneous mixed oligopoly

“…There is also extensive literature on nationalization performance, but it lacks a unanimous view. Melek (2018) finds that nationalization in samples of oil‐producing countries resulted in great productivity losses. Baldin and le Texier (2016) prove that a nationalization policy is effective for local governments only in highly differentiated horizontal product markets.…”