Managing the Economic Impact: Some Lessons from Norway Per Schreiner Senior Economist, ECON Analysis psc@econ.no

1. Escaping the Resource Curse:Managing Natural-Resource Revenues in low-Income CountriesThe Earth Institute at Columbia UniversityFebruary 26, 2004 Managing the Economic Impact:Some Lessons from Norway Per SchreinerSenior Economist, ECON Analysispsc@econ.no

2. Background • Oil and gas revenues came as a surprise • Expected only base rock • Without OPEC 1 little profit • White paper: Copies  1% of population • Prepared a decade before positive net revenue • Prepared in a boom that soon went bust • Assumed spending at the peak of full employment • Instead smoothening an international slump • Two main messages: • Domestic spending causes structural change • Cannot live from oil and gas alone

3. Lessons from White Paper no. 25 (1974) • Cannot live from the oil revenues only • The gold from the new world destroyed the economies of Portugal and Spain • No quick fixes for transforming revenues into economic development

4. Norway fairly successful — so far • What separates Norway: • It was already a developed industrial country • Norway’s institutions were mature • Norway charted a long-run-oriented, tax-based, and reasonably market-friendly approach • Even so, Norway faces challenges • Populist tendencies in the parliament • “Throwing money at problems”, • Avoiding unpleasant adjustments • Some (weak?) signs of the Dutch disease • Absence of a large, vibrant high-tech manufacturing • Sluggish foreign direct investment • Unsatisfactory non-oil export growth • Corruption: We thought that we were immune, but … • Eva Joly

5. Scandinavian GDP per capita (1999 USD, PPP) Data from BLS (2003), Table 1, http://bls.gov/fls

6. Norwegian trends and policies • Early debates (startedbefore net revenues) • Counter-cyclical policies (at least attempts) • Fiscal discipline (at least periodically) • State fund investing abroad • Highly centralized wage formation system • Solidarity Alternative - manufacturing as wage leader • Transparency and consensus on consequences • Increased female participation • Spillover-losses in traded sectors substituted for by gains in the highly technological off shore sector • Subsidies, transfers, tariffs to protect manufacturing • Investments in education, R&D, know-how

7. Coping with highly unpredictable revenues • Hesitation to face variability and uncertainty • Postponing the problem by repaying debt • Heavy borrowing before the revenue started to flow • Hiding the revenue – Shifting it to the future • Cash basis accounting of government investments (SDFI = the State's Direct Financial Interest) • Finally (1990) an oil fund • First intended as a buffer, but soon also a savings device • All revenues to the fund, all spending via the fiscal budget, no borrowing to the fiscal budget

8. Net cash flow from petroleum extraction(percent of GNP) 1980 1999 Source: St meld nr 1 (1997-98)

9. We did not avoid cyclical development! Annual growth rates of GNP  GNP  GNP Mainland Norway Source: Fig 9, SSB Notater 2003/43 Oslo 2003

10. Managing the rise in revenues • Originally no belief in possibility of not spending revenues immediately • Therefore planned to steer the flow of revenues by regulating production • But very high capital costs in offshore • Therefore trying to regulate production via licenses to explore • But success rates are unpredictable • Also prices are unpredictable • We (Ministry of Finance) tried to hide the magnitude • In vain, so finally (1990) an oil fund was created

11. Three ways to spend the oil revenue (percent of Mainland Norway GNP) SavingSpendingUsing real return of financial assets Source: Chart 3.12 in Report No. 30 to the Storting (2000-2001)

12. Source: Chart 2, The Norwegian Government Petroleum Fund, http://odin.dep.no/fin Norwegian petroleum wealth (percent of GDP)

13. The Norwegian Petroleum Fund • The Petroleum Fund implies a diversification of the petroleum wealth from resources to financial assets • It does not imply additional savings • Keeping the assets in a fund is an accounting device • A fund increases visibility and awareness of the petroleum revenues as distinct from other revenues • It does not in itself guarantee stability • It must not be allowed to become a state within the state

14. Net oil revenues + Return on investments Non-oil revenues Transfer to finance non-oil budget deficit  estimated 4% real return on assets Expenditures How the fund works • No borrowing in the budget • No spending or lending directly from the fund Source: Figure 2, The Norwegian Government Petroleum Fund, http://odin.dep.no/fin

15. Afund may be lost in lower growth rate Years

16. Importance of transparency and pluralism • The main protection lies in transparency and countervailing interests to curb petrolization • Transparency is no simple matter, but easier to achieve at an early stage when vested interests are still not established • If a political majority wants to waste the wealth, it is difficult to stop it • Therefore, build constituencies that have a stake in the long-term development of the society • Associations of fishermen, for example, may oppose oil exploitation that could pollute the source of their livelihood • We try now to link the fund to financing old age pensions • Thomas Friedman (New York Times, May 2001): • Let’s make all aid, all IMF-World Bank loans, all debt relief conditional on African governments’ permitting free FM stations. Africans will do the rest

17. Exchange rate management • In principle regulated exchange rates up to 1990 • Worry about excessive appreciation caused by expectations about high surpluses • However, over 20 years successive devaluations caused by domestic inflation • First the Central Bank remit: exchange rate stability • With little success • Now the Central Bank is mandated to steer toward an inflation rate of 2.5% • With little success (now 0.1%) • Sensitivity of a small currency to volatile expectations an argument for joining the EU • Adopting the EURO?

18. Summing up • Short-run planning needs a long-term perspective • “A qualitatively better society” as guideline • We had time to induce some sobreity into the euphoria • An oil fund needs broad public consensus • Our attempts to hide the magnitude of revenues unsuccessful • Transparency necessary but not sufficient • No fund statute will hold against public opinion • Tragedy of the commons: privatization, link to pensions? • Unity of the budget • No government borrowing, only transfers from fund • No separate spending or lending bodies • Possible earmarking to funding pensions

19. Coordination with aid flows? • A sad fact that aid flows are not coordinated • Not between donors • Not by each donor between channels • Not with the fiscal budgets of recipient countries • Also, aid flows are not predictable • Many flows are decided on a one year basis well into the fiscal year • Oil revenue flows probably are more predictable • Unity of the fiscal budget must be the goal • Demand management and democratic control over priorities impossible with multiple spending centers