To Keep from Sp-Oiling



A Norwegian how-to for avoiding the oil curse.

Photo taken by Milly
Photo taken by Milly

On Wednesday, September 25th, 2013, His Excellency Jens Stoltenberg, the Prime Minister of the Kingdom of Norway, gave a public address at the Institute of Politics on Norway’s economic success at avoiding “the Oil Curse.” Stoltenberg has served two terms as the Prime Minister and has a background in economics and finance, having worked as a lecturer in economics at the University of Oslo from 1989 to 1990 and as the Minister of Finance from 1996 to 1997. He is a strong supporter of the United Nations and believes in fighting both poverty and global warming together.

The Oil Curse is the term used to refer to the many observed cases of countries that became wealthy from high revenues from natural resources, but eventually faced heavy debts and fell into financial ruin — hence the curse. However, Norway has managed to successfully avoid this curse despite its high revenues from oil and gas, and Prime Minister Stoltenberg was here to share why.

The first graph he showed plotted a country’s economic growth per capita against the percentage wealth that country obtains from natural resources. There was a negative relationship. But why would more natural resources lead to lower economic growth per capita? This would seem counterintuitive, as more wealth should lead to greater economic growth. The simple answer, as Prime Minister Stoltenberg revealed, is too much spending. Countries who obtain explosive wealth from natural resources often spend too much too quickly. This overheats the economy and productivity decreases, and the country begins to function based on a structure of heavy spending. “This,” he declared, “is known as the Dutch Disease,” aptly named after the country in which this very situation happened.

So how can we avoid the oil curse? Prime Minister Stoltenberg listed three main strategies that Norway adopted.

Strategy one: Keep expenses below revenue. Usually, it is good economic practice to have a balanced budget, as this would promote healthy economic growth. But in Norway, it was better to have an unbalanced budget. The revenue from natural resources was put in a fund, and the government only spent the financial income from that fund — the expected value of the natural real return. Currently, that return is around 4%, but the government actually spends around 3%, which is less than what they could potentially be spending. This leads to a buildup of a Pension Fund, which has a 40% investment in bonds, and a 60% investment in equity. They currently invest in more than 7000 companies worldwide and their average ownership in each company is 1.75%.
This is the diversification strategy. It is, all else equal, better to spread one’s wealth across multiple venues as opposed to just one. This is because if one of these multiple venues perform badly, you will not be as affected by the poor performance as you would if all of your wealth was invested in it. But with diversification, one will never outperform the market. Of course, this is just fine for Norway. Prime Minister Stoltenberg said that their goal is not to outperform the market, but to just do what the market does.
Incidentally enough, because Norway has set guidelines on 40% stock and 60% equity, they must spend money on these despite economic situations. But this played in their favor during the downturn of the economy in 2008. When prices fell, Norway ended up buying more since each dollar now had more buying power and they had a set guideline of how much they had to spend. And now that prices are rising once again, Norway has greatly benefited as the value of the fund increased rather drastically in the past few years.
The key idea to take away from this, as Prime Minister Stoltenberg says, is to not out-spend the revenue from natural resources.

Strategy two: Keep people at work. Prime Minister Stoltenberg said that the value of labor is far greater than the value of gas and oil. Their current high employment rates, and in particular, a very high female labor employment rate, contributes more to their economy than revenues from gas and oil.
Norway has helped to encourage greater workforce participation, especially amongst females by implementing family programs. Kindergarten starts at the age of 1, allowing for parents to go back to work without having to hire someone to look after their child. Parents are also allowed to take a one-year leave. Fathers are, in fact, granted fourteen weeks of leave to look after their newborn.
Prime Minister Stoltenberg believed that these combined factors have helped to keep both employment and fertility rates high. Norway has one of the highest fertility rates in Europe.
The key idea to take away from this strategy is that the largest contributor to a country’s economy is labor.

Strategy three: Increase productivity. Over the last few years, Norway has seen a stronger increase in productivity. It has a competitive business sector that is well-run and efficient, and the state promotes private businesses. Overall, Prime Minister Stoltenberg says that the government has worked hard to create a good business environment.

A very interesting topic that he touched upon when discussing businesses was wealth distribution. It is commonly believed that countries with high incomes will have a high degree of inequality as the vast amount of wealth is actually distributed amongst only a few of the very wealthy. However, as Prime Minister Stoltenberg showed on another graph, there is both high income and a high degree of equality in Norway. Compared to the US, without oil and gas revenue, Norway falls a little below on income, but has higher equality. But with the addition of oil and gas revenue, Norway has higher income than the US, as well as higher equality.

It is with these three strategies, as Prime Minister Stoltenberg said, that Norway managed to turn their oil and gas revenues into a blessing, and not a curse.

Milly Wang ’16 ([email protected]) is sorry her editor thinks she’s so slick.