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Escaping the Resource Curse: Managing Natural-Resource Revenues in low-Income Countries The Earth Institute at Columbia University February 26, 2004. Managing the Economic Impact: Some Lessons from Norway Per Schreiner Senior Economist, ECON Analysis psc@econ.no. Background.

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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


Background l.jpg
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


Slide3 l.jpg

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


Norway fairly successful so far l.jpg
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


Scandinavian gdp per capita 1999 usd ppp l.jpg
Scandinavian GDP per capita (1999 USD, PPP)

Data from BLS (2003), Table 1, http://bls.gov/fls


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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


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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


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Net cash flow from petroleum extraction(percent of GNP)

1980 1999

Source: St meld nr 1 (1997-98)


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We did not avoid cyclical development!

Annual growth rates of GNP

 GNP

 GNP Mainland Norway

Source: Fig 9, SSB Notater 2003/43 Oslo 2003


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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


Three ways to spend the oil revenue percent of mainland norway gnp l.jpg
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)


Norwegian petroleum wealth percent of gdp l.jpg

Source: Chart 2, The Norwegian Government Petroleum Fund, http://odin.dep.no/fin

Norwegian petroleum wealth (percent of GDP)


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The Norwegian Petroleum Fund http://odin.dep.no/fin

  • 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


How the fund works l.jpg

Net oil revenues http://odin.dep.no/fin

+ 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


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A http://odin.dep.no/finfund may be lost in lower growth rate

Years


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Importance of transparency and pluralism http://odin.dep.no/fin

  • 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


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Exchange rate management http://odin.dep.no/fin

  • 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?


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Summing up http://odin.dep.no/fin

  • 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


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Coordination with aid flows? http://odin.dep.no/fin

  • 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