Norway’s wealth: Not just oil
Thorvaldur
Gylfason[1]
6 June 2008
Norwegians enjoy a very high standard of
living. Is it due to their oil? This column describes the country’s impressive
economic development during the twentieth century and highlights lessons from
Norway’s management of its oil wealth.
Norwegian children
are taught in school that Norway was Europe‘s most impoverished country in
1905, when the Norwegians unilaterally dissolved their royal union with Sweden
and declared full independence. This is not quite true; Finlandand Icelandwere
even poorer than Norwayat the time. A hundred years later, the
five Nordic countries form an economic cluster, sharing similar living
standards, with Norwayleading the pack. In Denmark, Finland, Iceland, and
Sweden, per capita GDP (at purchasing power
parity) in 2005 was between $32,000 to $35,000, compared with $42,000 in
Norwayand the United States.
How
did Norwaydo it?
Many Norwegians
believe that their natural resource wealth – first timber, then hydropower, now
oil and natural gas – transformed Norwayin one short century from a destitute
place
to one of the most affluent countries of the world. But is this a correct
description? I have my doubts. Finland and Iceland‘s per capita incomes were
only about a half of those of Denmark and Sweden around 1900. Yet, since then,
Finlandand Icelandhave caught up without the gifts of nature
offering a clear and decisive advantage, even if Finlandhad timber and
Icelandhad fish. Icelandhad always had fish, but it was not until
the natives had acquired the requisite education and technology that they were
able to launch a fishing industry. An even clearer case is that of Irelandand
the United Kingdom. The Irish were significantly less well off
than the British in 1900, and now Ireland‘s per capita GDP has surpassed that
of the mother country; yet neither nation possesses any significant natural
resources apart from farmland (plus a dash of oil in the case of the UK).
It seems likely
that Norwaywould have caught up with the rest of Europewith or without its
natural resources, much
as Irelandcaught up with the UKwithout the benefit of natural resource
wealth. This is also how Denmark, Finland, Iceland, and Sweden, which in the
second half of the 19th century lost a quarter of its population to emigration,
were able to lift themselves up from close to the bottom of the heap in Europe
around 1900 to close to the top in 2000, despite benefiting to varying degrees
from their natural wealth. The decisive factor was the people.
Norway, of course, always had its natural
resources; but it was only with the advent of educated labour that it became
possible for the Norwegians to harness those resources on a significant scale.
Human capital accumulation was the primary force behind the economic
transformation of Norway; natural capital was secondary. Human
capital accumulation can lift living standards without natural capital (as in
Japanand Singapore, for example), but natural capital is of
little help or worse without the human resources necessary to harness it
(consider Congo).
Not unexpectedly,
in light of its considerable oil wealth, Norwayexhibits some (weak) symptoms of
the Dutch
disease:
· An
almost stagnant ratio of exports of goods and services to GDP since before oil
and gas became Norway’s main export commodity, suggesting significant crowding
out of nonoil exports by oil exports;
· The
absence from Norwayof world-renowned high-tech companies such
as Denmark’s Bang&Olufsen, Finland’s Nokia, and Sweden’s LM Ericsson and Volvo;
and, one might
add,
· An
unwillingness by the Norwegian government, or perhaps we should rather call it
a lack of urgency, to undertake pressing reforms in the public sector,
including education and especially health care as suggested, for example, by an
eye-opening report by Professor Victor Norman and associates in the early
1990s.[2] True, there have been significant reforms, but they have not increased
efficiency nearly enough. Perhaps Norway’s persistent lack of interest in
joining
the European Union and adopting the euro should be viewed in this light.
Higher
incomes, less work
The above
discussion raises the following question: Does the fact that Norwaymanaged only
to advance to a slightly
higher level of per capita income than its Nordic neighbours that are much less
well endowed with natural resources mean that Norwayfailed to exploit its
resources as fully as
it could have? Did something go wrong? My answer is no, for two reasons.
First, Norway’s level of GDP per hour worked is
substantially higher than that of its Nordic neighbours because Norwegian
employees work about 1,400 hours per year, compared with 1,600 hours in
Denmarkand Sweden, 1,750 in Finland, and 1,800 in Iceland.[3] The Norwegians
have
taken out their steadily increasing standard of living on two fronts at once -
through higher incomes and more leisure. For this reason, per capita income
growth understates the rapid advance of Norwegian living standards. Growth of
income per hour worked, a broader and better measure of economic wellbeing,
suggests the emergence of a larger difference between Norwayand its neighbours.
Second, without
its resource wealth, Norwaywould almost surely have achieved a
comparable economic success by employing its increasingly well-educated labour
force in other ways. Then Norway, like its neighbours, would most likely
have built up more high-tech firms, but oil wealth and the concomitantly high
exchange rate of the Norwegian krone, another common symptom of the Dutch
disease, thwarted such an outcome.
Norway’s oil management regime
Norway’s sensible approach to oil wealth
management deserves the attention it has received in other resource-rich
countries around the world. Norway’s approach has several key features:
* From the beginning, before the first drop of oil emerged, the oil and
gas reserves within Norwegian jurisdiction were defined by law as common
property resources, thereby clearly establishing the legal rights of the
Norwegian people to the resource rents.
* On this legal basis, the government has absorbed about 80 percent of
the resource rent over the years, having learnt the hard way in the 1970s to
use a relatively small portion of the total to meet current fiscal needs. Most
oil revenue is set aside in the state petroleum fund, recently renamed the
pension fund to reflect its intended use.
* The government laid down economic as well as ethical principles
(commandments) to guide the use and exploitation of the oil and gas for the
benefit of current and future generations of Norwegians.
* The main political parties have, from the beginning, shared an
understanding that the national economy needed to be shielded from an excessive
influx of oil money to avoid overheating and waste.
* The Central Bank (Norges Bank), which was granted increased
independence from the government in 2001, manages the fund ( around $400
billion or $85,000 per Norwegian) on behalf of the Ministry of Finance. This
maintains a distance between politicians and the fund. The fund constitutes net
government wealth as no offsetting government borrowing takes place.
For all these
reasons, Norway was able to avoid rent seeking and related problems that have
afflicted other oil exporting countries – Iran, Libya, Mexico, Nigeria, Russia,
Saudi Arabia, Sudan, Venezuela, etc. Clearly, what sets Norwayapart from those
other countries is that Norwaywas a well-functioning, full-fledged
democracy long before its oil discoveries. Democrats are less likely than
dictators to try to grab resources to consolidate their political power.[4] Oil
and other forms of energy have become Norway’s main export in more ways than
one as the
state-owned StatoilHydro is now present in some 40 countries around the world.
In this light, and
also in view of Norway’s successful management of its substantial hydroelectric
resources, also through state ownership, it is striking that Norway’s
management of yet another important natural resource – fish – has left much to
be desired, to put it mildly, as is the case in most other fisheries around
Europe and the world with dwindling fish stocks, some on the verge of
extinction due to overfishing and other forms of mismanagement.[5]
In Norway, there may be a rational reason for the
difference. It was decided decades ago to subsidise the fishing industry in
northern Norway, much like agriculture, and to limit the
size of trawlers permitted to fish in Norwegian waters, among other
regulations. The authorities would hardly ever admit this, but they seem to
have held back the efficiency of the fishing industry in a deliberate effort to
maintain its manpower needs to stem migration from north to south. If so, this
was not solely a regional policy undertaking, and hardly a cost-effective one
as such, but also a matter of foreign policy as Norwayshares part of its
northern border with Russia. It is, perhaps, easier to build a
management system from scratch, with no vested interests in place, as the
Norwegians did with their oil management.
________________________________
[1]Professor of Economics, Universityof Icelandand CEPR (Centre for Economic
Policy
Research) Research Fellow.
[2]See Victor Norman et al. (1991),
Mot bedre vitende? Effektiviseringsmuligheter i offentlig virksomhet (Against
Better Judgment? How to Make
the Public Sector More Efficient), SNF-rapport 4/91, Stiftelsen for Samfunns-
og
Næringslivsforskning,
Norwegian Schoolof Business Administration, Bergen.
[3] Source: Angus Madisson and associates at the Universityof Groningen,
http://www.ggdc.net.
[4] Mehlum, Halvor, Karl Ove Moene, and Ragnar
Torvik, “Cursed by resources or institutions?”, World Economy, 2006, August,
pp. 1117-1031.
[5] See my recent VoxEU column, Dwindling fish:
what’s the catch? (http://www.voxeu.org/index.php?q=node/871)
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