Lessons from Norway

What is the secret to economic development? According to the recently released Growth Report from a group of economists lead by Michael Spence, economies develop with the “right mix of ingredients“. William Easterly is predictably skeptical about any lesson that can be learnt from the past and drums up his usual claim that nothing is predictable. Indeed, who could have predicted that “South Korean entrepreneurs would create a carmaker (Hyundai) with greater market value than General Motors or Ford or that a schoolteacher named Dong Ying Hong, formerly earning $9 a month in Datang, China, would become a millionaire making socks“? Some lessons can be learnt from past successes and while some things are not predictable at an individual level, others are at a macro level. For instance, one can reasonably predict that, with its current policies, North Korea will never produce a Dong Ying Hong. The Growth Report does offer fascinating insights into the successes of 13 countries which have grown by more than 7% in the last 25 years. With the exceptions of Botswana and Oman, these high-growth economies are not particularly well-endowed in natural resources – they grew by acquiring ideas and technologies and know-how from the rest of the world. And the report identifies some countries which face more challenges than others in sustaining growth, among those are resource-rich countries. Thorvaldur Gylfason explains how Norway has avoided the resource curse:

From Rags to Riches:

Norwegian children are taught in school that Norway was Europe‘s most impoverished country in 1905 … This is not quite true; Finland and Iceland were even poorer than Norway at the time. A hundred years later, the five Nordic countries form an economic cluster, sharing similar living standards, with Norway leading the pack.

Many Norwegians believe that their natural resource wealth – first timber, then hydropower, now oil and natural gas – transformed Norway in 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 … It seems likely that Norway would have caught up with the rest of Europe with or without its natural resources, much as Ireland caught up with the UK without the benefit of natural resource wealth. The decisive factor was the people.

Avoiding the Resource Curse:

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 Norway apart from those other countries is that Norway was a well-functioning, full-fledged democracy long before its oil discoveries.

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.

How difficult is it to avoid the Resource Curse?

Not unexpectedly, in light of its considerable oil wealth, Norway exhibits 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 Norway of 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. 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.