Norway: Proof (or not) that Oil Need Not be a Curse for Developing Nations

Stephen DeAngelis

September 14, 2009

I have noted in several past posts that many analysts believe that developing countries sitting atop significant oil reserves are cursed rather than blessed by that resource (see, for example, my post entitled Oil and Development). The latest voice to discuss the “curse of oil” is Moisés Naím, editor-in-chief of Foreign Policy [“Oil can be a curse on poor nations,” Financial Times, 18 August 2009]. He writes:

“Oil is a curse. Natural gas, copper and diamonds are also bad for a country’s health. Hence, an insight that is as powerful as it is counterintuitive: poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil – or gold or zinc – makes you poor. This fact is hard to believe, and exceptions such as Norway and the US are often used to argue that oil and prosperity for all can indeed go together.”

Naim argues that Norway and the U.S. are exceptions that prove the rule. He continues:

“The rarity of such exceptions, however, not only confirms the rule, but shows what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency and effective public institutions that are responsive to citizens. These are important preconditions for more technical aspects of the recipe, including the need to maintain macroeconomic stability, manage public finances prudently, invest part of the windfall abroad, set up ‘rainy-day funds’, diversify the economy and ensure the local currency does not reach too high a price. It all sounds sensible, and with Brazil, Ghana and others soon likely to become big oil players, we can expect to witness some rare test cases of these recommendations.”

I certainly can’t argue with his “important preconditions.” They echo what I have been saying. The hopelessness for poor, but resource rich, developing countries found in Naim’s arguments is hard to accept, even if it reflects a stark reality. He claims that countries like Norway and the U.S. are immune to the curse because all of the favorable pre-conditions for development existed before oil was discovered. Where those pre-conditions are not present before oil’s discovery, the so-called black gold, Naim claims, runs through a developing economy “like an autoimmune disease” undermining “the ability of a country to build defences against it. Concentrated power, corruption and the ability of governments to ignore the needs of their populations make the curse hard to resist.” This post, however, isn’t really about poor countries and the curse of oil; rather, it’s about Norway and how it has managed to become prosperous and remain prosperous even during the current recession [“Thriving Norway Provides an Economics Lesson,” by Landon Thomas, Jr., New York Times, 13 May 2009].

“As investors the world over sold in a panic, she bucked the tide, authorizing Norway’s $300 billion sovereign wealth fund to ramp up its stock buying program by $60 billion — or about 23 percent of Norway ’s economic output. … The global financial crisis has brought low the economies of just about every country on earth. But not Norway. … Norway has thrived by going its own way. When others splurged, it saved. When others sought to limit the role of government, Norway strengthened its cradle-to-grave welfare state. And in the midst of the worst global downturn since the Depression, Norway’s economy grew last year by just under 3 percent. The government enjoys a budget surplus of 11 percent.”

For countries desiring a good example of how to invest petro-dollars, Norway stands alone.

“Norway avoided the usual trap that plagues many energy-rich countries. Instead of spending its riches lavishly, it passed legislation ensuring that oil revenue went straight into its sovereign wealth fund, state money that is used to make investments around the world. Now its sovereign wealth fund is close to being the largest in the world, despite losing 23 percent last year because of investments that declined. Norway’s relative frugality stands in stark contrast to Britain, which spent most of its North Sea oil revenue — and more — during the boom years. Government spending rose to 47 percent of G.D.P., from 42 percent in 2003. By comparison, public spending in Norway fell to 40 percent from 48 percent of G.D.P.”

The question is what makes Norway so different? Anders Aslund, an expert on Scandinavia at the Peterson Institute for International Economics in Washington who was interviewed by Thomas, claims it’s because Norwegians have “a sense of virtue. If you are given a lot, you have a responsibility.” One of the things that the international community needs to figure out in order to help developing countries avoid the curse of oil is how to help them develop “a sense of virtue” that can turn the curse into a blessing. It will likely be a hard sell since leaders in the developed world don’t always act in a virtuous way. After all, it was the greed, corruption, and incompetence of the developed world that triggered the latest recession. The problem, however, is much worse in the developing world. Naim points out in his op-ed piece that oil generally produces vice rather than virtue in government leaders.

“Once in power, such oil-rich governments are hard to dislodge, spending vast public resources to buy out or repress political opponents. Statistically, an authoritarian oil country is far less likely to move to democracy than a resource-poor autocracy. Oil-rich governments in developing countries spend two to 10 times more on their militaries than poor or middle-income countries, and are more prone to go to war. Most oil-exporting countries that do not have strong democratic institutions before they start exporting crude create an inhospitable environment for democracy. This explains why the sovereign wealth funds, oil-stabilisation funds and other solutions tried by resource-rich countries to avoid the effects of volatility, fiscal excess, indebtedness, export-inhibiting exchange rates and other ill effects rarely work. They get raided before the rainy days or are squandered in poor investments.”

The frugal Norwegians are not free from problems. Some citizens fear that they are losing their work ethic. Generous government subsidies permit some people to simply live off government dole with no need to look for work. On the whole, however, Norway has done very well with oil revenues. And they are hoping to not just to stay prosperous but to do good with their sovereign wealth as well [“Norwegian state fund in $4bn green push,” by James Lamont, Financial Times, 1 September 2009]. Lamont reports:

“Norway’s $400bn sovereign wealth fund, the world’s second largest, has overhauled its investment strategy to increase its exposure to environmentally responsible companies in an effort to combat climate change.”

The fund has pledged to invest about $4 billion in “‘green shares’ targeting investments in the developing world.” It has already “invested $1.2bn into 232 Indian companies that support environmental sustainability and clean energy.” Norway specifically targeted India because it has “resisted agreeing to reductions in emissions saying that they would unfairly curb its economic growth.” The Norwegians are hoping that they can help convince the Indians to do their part in reducing greenhouse gas emissions by showing that their economy can actually benefit by developing green technologies.

“Shyam Saran, a special envoy on climate change for India’s prime minister Manmohan Singh, said that unless technology was made available to countries like India to steer production and consumption away from fossil fuels they would not be able to meet the challenges posed by climate change.”

Both developed and developing countries can benefit from Norway’s example. The question remains as to whether they will — especially developing countries. Naim concludes:

“Is all hope lost for poor countries with rich natural resources? Not quite. Chile and Botswana stand out as success stories on continents where the resource curse has otherwise wrought havoc. How they were able to protect themselves is still a mystery. Unlocking the secret of their escape from the resource curse could spare millions from [what Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s, called] the devil’s excrement. But nobody has done it yet.”

With so much at stake for so many people, let’s hope that someone does solve the “mystery” and figures out how to convince countries to invest their resource revenues in a brighter future. The Norwegian philosophy is, “We cannot spend this money now; it would be stealing from future generations.” Greed and ambition require immediate satisfaction and those inflicted with those maladies have difficulty seeing consequences lurking over the horizon. Too much of the world’s wealth has already been squandered through corruption. Unfortunately, the future of many of the world’s poor has also been squandered along the way.