Norway’s Version of the Resource Curse

Restraining Government in America and Around the World – Dan Mitchell – June 8, 2017

My cmnt: The point of my posting this article about Norway’s oil dependence (and the sister column on Denmark’s oil dependence, and I could add Canada also) is that these are all small (population) northern latitude, homogenous countries with a strong, inherited Protestant work ethic. This keeps them from going insane like the democrats in America who have essentially wanted slavery or communism (another form of slavery) for the past 200 years. However – all three of these countries pretend to be environmentally Green (which means above all else NO oil) but could NOT support their generous welfare states without oil revenues. This blatant hypocrisy harms the world. They should own up and admit oil is a GOOD thing and we all need it.

There are a lot of positive things to be said about Norway.

In other words, Norway is a typical Nordic nation, with open markets, light regulation, free trade, and honest government. That’s the good news.

The bad news, at least from my perspective, is that Norway also is a typical Nordic nation in that it has a big welfare state.

But unlike the other Nordic nations, Norway also has a lot of oil. And, just like Alaska, it’s very easy to finance a big public sector when a government has access to a huge amount of petroleum-related revenue.

So does this make the country special? Is Norway a welfare-state Nirvana? In some sense, the answer is yes. As I’ve noted before, if a country wants a big welfare state, it makes a lot of sense to have very market-oriented policy in other areas to compensate. And if the country also happens to be rich with oil, that’s presumably not a bad combination.

But I would argue, of course, that Norway would be in better shape if the fiscal burden of government wasn’t so onerous.

And there’s growing evidence to validate my concerns. Bloomberg reports that falling oil prices are exposing problems with Norway’s extravagant welfare state.

Norway isn’t in any immediate danger, but I wonder whether it can still prosper when the oil runs out.

Simply stated, the welfare state may have eroded the country’s work ethic (something that’s also a problem in America).

That’s something that the stewards of the system readily admit. The agency’s acronym has even become a verb, to NAV, which means `being on benefits.’ “To uphold the Norwegian welfare system we need more people at work and not on passive benefits,” said Sigrun Vageng, the head of NAV, in an emailed answered to questions.

The problem of dependency has even spread to the richer parts of the country.

…dependency on state handouts now runs deeper. It also spread to the nation’s richest regions after the plunge in oil prices… Welfare payments in Rogaland, the regional center of the oil industry and home to Statoil ASA, rose a whopping 13 percent last year. Some 19 percent received benefits on average each month in Rogaland. In Oslo, it was 15 percent.

And once there are too many people riding in the wagon of government dependency, it’s not easy to rejuvenate a nation’s social capital.

…with an increasing share of its working age population on welfare benefits instead of paying taxes, the desired changes could prove a difficult task for whoever is in power. And many are also pulling out of the workforce altogether. The percentage of people of working age in employment fell to 70.6 percent in 2016, a 21-year low… “This comes as a big cost for the society, both through lost tax revenues and the direct expenses from social benefit payments,” said Jeanette Strom Fjaere, an economist at DNB.

On the bright side, Norway has set aside lots of oil money.

Norway…has over the past 20 years built up a sovereign wealth fund.

In other words, Norway is the opposite of Venezuela. It hasn’t squandered its oil wealth on bigger government.

On the dark side, it has reached the point where its sovereign wealth fund is shrinking rather than growing.

…the government last year started withdrawing cash for the first time.

Some people say this is similar to America’s Social Security system, which has a Trust Fund that is now being depleted. I reject that analogy for the simple reason that Norway’s fund is filled with real assets. The Social Security Trust Fund, by contrast, is nothing but a pile of IOUs (as even the Clinton Administration acknowledged).

Some argue that Norway, with its commitment to the rule of law and markets, is the exception to the rule. Yes, its welfare state is excessive, but not because of oil. Indeed, there’s more welfare spending as a share of GDP in Denmark, Sweden, and Finland.

Though don’t forget that Norway’s GDP is boosted by all the oil wealth, so I’m guessing per-capita welfare outlays are higher than in neighboring countries (an important distinction, as illustrated by this data on government health spending).

So perhaps a version of the resource curse will hit Norway. But it won’t be because of a Venezuelan-style kleptocracy. Instead, it will be because the welfare state lures too many people into dependency. And when the oil money runs out, fixing that problem will be very difficult.

One thought on “Norway’s Version of the Resource Curse

  1. Thank you so much for this information. I absolutely had no idea that liberal, socialist-type welfare states like Norway and Denmark are such hypocrites. Here they sign the Paris Accords which pledges them to get rid of oil while both are utterly dependent upon its revenues to maintain their welfare programs and life styles. They condemn oil with one hand and sell it with the other. Kind of like drug pushers. I’m never voting democrat again. They claim the Nordic states are examples of sustainable social-welfare models when in point of fact they cheat to maintain them.

    Like

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