Several decades after petroleum had become the predominant transport fuel and had taken over the collective imaginations of politicians and militaries around the world, Juan Pablo Pérez Alfonzo, one of Opec’s founders, termed oil as “the devil’s excrement”.
This was a humbling reflection of how oil had consumed several societies as leaders tried to ride on fiscal waves fuelled by oil to bring glory to their states. A case in point is Venezuela; then President Carlos Pérez announced his vision of Le Gran Venezuela, an industrialized and self-sufficient nation that would become a developed country on the back of windfall oil revenues in the 1970s.
The plan met initial success as burgeoning government revenues were spent on education and welfare. When oil prices plummeted in 1980s, however, the country fell into an abyss of high inflation, rising inequality and unemployment. Oil—once thought to be the vehicle of a country’s prosperity—quickly turned into a “curse”.
While much of Venezuela’s modern history has been characterized by political upheavals that were not triggered by oil, this industry has contributed to economic disruptions within the country and amplified the negative impacts of poor policy planning.
There are at least two ways in which this has happened in “petro states” such as Venezuela, Saudi Arabia, Nigeria, Algeria and Iran. Firstly, as oil became a significant share of an economy’s exports, it overvalued domestic currency, therefore making its exports more expensive. Consequently, non-oil exports become uncompetitive, and cheap imports flooded the economy, thereby leading to a decline in the domestic non-oil industry. This phenomenon is called the Dutch disease, after what happened to the Netherlands in the 1960s, when its economy become excessively reliant on natural gas exports.
The second type of detrimental impact has been triggered by the increasing reliance of government spending on oil prices. Periods of high oil prices often lead to increasing government spending that cannot easily be undone in years of low prices. The sudden rolling back of subsidies and welfare programmes can lead to political backlash, and maintaining high quantum of spending by borrowing can lead to debt-traps. Further, windfall revenues from oil seem to promote rent-seeking behaviour and investment into unproductive activities.
A far cry from oil exporting countries that have fallen to this “oil curse” is Norway. In many ways, it is a surreal country. Think of the most efficient and thoughtfully created institutions and infrastructure around the world, and put them all in one place. Think of futuristic electric vehicles silently cruising on the roads, and the electricity grid almost entirely powered by clean renewable energy. Think of prosperous workers finishing their work day at 4pm, and heading to the fjords for some outdoor activities. Even doctors get weekends off while working a mere 7 hours a day—something that would be unheard of in much of the world.
It is no surprise that Norway tops the tables of socio-economic and happiness indicators. The high standard of living is easily discernible. While no society is devoid of shortcomings—and Norway has its share—Norwegians I interacted with struggled to list out major social, economic or political problems in the country. Things somehow seem to just work.
Norway’s unpolluted environs and social stability may well deceive a passing tourist on the nature of the economy. With a national population that is only a fourth of New Delhi’s, Norway happens to be among the top 10 largest exporters of crude oil in the world, and in fact, the largest to Europe. The petroleum sector contributes to 21% of all investments in the economy and employs over 180,000 directly and indirectly. This gentle economy is in fact powered by petroleum—even if Norwegians themselves don’t like using it.
How then, did Norway avoid stepping into the “devil’s excrement”? Herein lies a story of calm thinking about the role of oil in the economy, prudent resource planning and of course, good fortune.
An equitable economy built before the discovery of oil
First and foremost, unlike other petroleum-rich states, Norway benefited from not having discovered petroleum until much after it had already built a stable, wealthy and equitable economy with high standards of living. Public institutions already had strong checks and balances, along with democratic accountability before 1969, when the first oil field was discovered in the Norwegian continental shelf, several decades after Iran (in 1908), Venezuela (in 1922) and Saudi Arabia (in 1938). In fact, until 1958, the National Geological Survey did not even believe that the Norwegian oil shelf could possibly have oil.
Norway gained independence from Denmark in 1814, although continued to be in a loose union with Sweden until the early 1900s. The nation initially lacked its own institutions, industrial entrepreneurs and domestic capital. Owing to a vibrant shipping industry, agriculture and fish exports, Norway became prosperous by 1875, after four decades of rapid expansion.
This was followed by a turbulent few decades going into two the world wars with economic stagnation and rising unemployment. After the second World War, however, the Labour Party began establishing a social democratic economy with a significant role of the public sector. The US Marshall Plan further pumped in $400 million into the Norwegian economy.
Norway therefore has the characteristics of “state capitalism” and the government continues to own significant stakes in key industries including telecommunication, electricity and mineral production, finance and banking, and of course, their largest oil company—Statoil.
The role of the bureaucracy
A second explanation of Norway avoiding the oil curse lies in its bureaucracy and institutions. Social scientists and economists have argued that Norway has long been a “civil servants’ state”, in that by the 1900s, their bureaucracy was already independent, relatively incorrupt and highly specialized.
Importantly, Norwegian bureaucrats did not have competing socioeconomic elites through much of the 19th and 20th centuries, and did not rely on external influence for career advancement. Democracy itself was participatory, open and stable, and the judiciary, independent. As a consequence, governance and policymaking in Norway has been rule-based and incrementalistic.
It is therefore unsurprising that within two years of discovering oil, Norway had already laid down the “10 commandments of oil” that provides the framework under which the nation will use their oil resources for the benefit of the citizens. These commandments include, among other guidelines, that the petroleum industry must not adversely impact other industries, or the environment, therefore recognizing the pervasive nature of the oil industry.
A consensus on fiscal prudence
Thirdly, Norway avoided the “oilification” of their economy by moderating welfare spending with the need for fiscal prudence after oil was discovered. Initially, owing to an international economic slowdown in the 1970s, the Norwegian government pursued a counter-cyclical expansionary fiscal policy by borrowing from abroad. Public expenditures went from kroner 1.5 billion in 1970 to 14.5 billion in 1975 and continued to rise until 1979. The ruling Labour Party increased spending in social services, pensions, agricultural and industrial subsidies, and public employment. This spending spree left other European countries behind in social development indicators. Consequently, real wages grew 25% between 1974 and 1977.
This debt was planned to be paid back from the anticipated windfall oil revenues from the 1980s and the state’s oil rents began in 1976 through export surpluses. All of this unsurprisingly led to foreseeable problems including inflation and the Dutch disease, with the shares of agriculture and industry falling in the 1970s. Rising labour costs due to oil production and public spending made labour expensive in the country and industry exports began falling steadily. This has been called as a “light Dutch disease” by Ole Gunnar Austvik of the Norwegian Business School.
Recognizing this problem, Norwegian policymakers informally slowed down oil production and investments in the 1970s in order to avoid negative impacts on the economy at large. Norway’s prime minister remarked in 1975, “Professors and so-called experts from other countries give us advice to speed up oil production. (But) we don’t want it. The point is to be sensible and careful”.
This was a stark contrast to other petro states where the political leadership got carried away with expected windfall revenues and did not fully appreciate the complicated nature of the new industry due to their lack of expertise. In these countries, existing state institutions were subsumed by the oil industry and new ones were created to foster it, locking the state into a dependency of hydrocarbons.
Norway’s political stability was maintained in spite of quick changes of governments in this period. For the first time in 50 years, the Conservative Party broke the Labour Party’s hegemony in 1981. They lost the next election partly because they could not revive the economy after the oil price fall. The Labour Party returned to power with alliances for the first time in the country’s modern history. However, despite such political changes, there was a consensus that Norway should not become too reliant on oil revenues.
The oil fund
That brings us to the fourth and perhaps the most important instruments in Norwegian oil policy. In 1991, the government set up the Petroleum Fund to insulate the nation from the boom and bust cycles of oil.
The idea was that the revenues from oil exports will not be converted into the domestic currency, thereby avoiding exchange rate pressure on it, and that domestic government budget would not become too reliant on oil revenues. Revenues would accumulate in a fund that would invest it into international financial markets.
To ensure prudent domestic use and maintenance of the size of the fund, there is a budgetary rule that prevents the government from withdrawing more than the annual expected returns of the fund. One of the current partners in the ruling coalition, called Progress Party, seeks to expand spending by using oil rents, but such pressure is being resisted.
Over time, the fund has become the world’s largest sovereign wealth fund with over $900 billion assets under management—which makes it twice the size of Norway’s GDP. In fact, the annual revenues of the fund often exceed the income from Norway’s annual oil sales.
Typical of Norway’s administrative culture, this fund is independently run and transparent, with every investment listed online. The fund also has an ethical component, with it refusing to invest in companies that have been suspected to be complicit of human rights or environmental violations, and selling tobacco or other products considered “unethical” by it. Indian companies such as ITC Ltd, POSCO and Vedanta are on this blacklist.
This petroleum fund is now called the Government Pension Fund, although this is just for cosmetic purposes, as Norway’s pensions are funded by their domestic tax contributions, and not this fund.
Importantly, the size of the petroleum fund is expected to stay healthy over the next several decades. Anders Bjartnes, the editor of Energi og Klima and the Norwegian Climate Foundation, argues that oil production activity will remain strong at least until 2030. Even disruptive electric vehicles will only be able to displace a small fraction of global oil demand, while natural gas demand is expected to rise as coal plants are being shut down and replaced with gas-fired ones in Europe and elsewhere.
Norway’s economy is therefore well placed even in the face of an increasingly decarbonizing world. The nation may have avoided the curse of oil by its thoughtful and prudent use of resources along with strong institutions, but in the words of historian Einar Lie from the University of Oslo, “No one—not even we ourselves—could have repeated our oil success.” The good luck of the timing of the oil discovery and global price movements ensured that Norway could develop a skilful and equitable economy without being consumed by the “devil’s excrement”.
Siddharth Singh is a guest researcher at the Fridtjof Nansen Institute in Oslo and a German Chancellor Fellow at the Wuppertal Institute in Berlin. He can be reached on Twitter @siddharth3 and on email at s_singh@outlook.com
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