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rfmcdonaldDoug Saunders' article in today's edition of The Globe and Mail explores Norway's success, in a world economy that offers very high prices for oil, in not catching the Dutch disease.
In the world of sovereign wealth funds, Norway's Government Pension Fund is a key player in Norway's economy, saving nearly four hundred billion dollars and administering this fund more effectively than oil-rich Alberta's Heritage Fund. Alberta's government saves only one-eighth of Alberta's oil revenues (versus 96% in Norway), preferring to divert the bulk of its funds to the general public to maximize domestic consumption. Norway's much icher sovereign wealth fund puts its money into long-term investments outside of Norway to help insulate the Norwegian economy over the long-term from economic shocks like the one that hit Alberta in the 1980s with falling oil prices. The main problem facing the Norwegian economy, in Saunders' recounting, is the country's ongoing labour shortages and the need for immigrants. Alberta doesn't have any problems on that front, at least.
Across Norway, the oil boom is being paralleled by record growth in the non-petroleum, export-driven economy. In November, Norway's non-oil private-sector economy reported quarterly growth of 1.9 per cent, the equivalent of a 7.6-per-cent annual growth – an astonishing economic performance, beating even the growth of oil and gas exports.
And that is the real surprise here. While it isn't hard for nations and provinces to get rich from oil, it is exceptionally hard – almost impossible, by conventional economic reasoning – for them to make money off anything else while the oil boom is taking place.
Everywhere else in the world – including Canada – a boom in oil has led to a decline, if not a complete devastation, of conventional businesses. It's a phenomenon known to economists as “Dutch disease,” after the tragic experience of the Netherlands, which discovered oil in the 1970s. As oil exports boomed, the flood of money into the domestic economy inflated the currency, provoked price increases and destroyed exports, leading to a decade of joblessness and rising inequality.
The same thing happened, on an even larger scale, in Britain in the 1980s. After North Sea oil was discovered, the British industrial economy was virtually obliterated, leaving four million people jobless. Poor countries, from Nigeria to Venezuela, have also discovered the economy-smothering nature of oil windfalls.
Among oil economies, Norway – the world's third-largest exporter and 10th-largest producer in 2006 – is almost alone in having avoided this fate. As oil has boomed, so has everything else, and it has boomed in areas that will continue to generate economic growth when the oil revenues are gone. This is no accident: For Norwegians, this is a story of planning, self-discipline and a long learning process.
In the world of sovereign wealth funds, Norway's Government Pension Fund is a key player in Norway's economy, saving nearly four hundred billion dollars and administering this fund more effectively than oil-rich Alberta's Heritage Fund. Alberta's government saves only one-eighth of Alberta's oil revenues (versus 96% in Norway), preferring to divert the bulk of its funds to the general public to maximize domestic consumption. Norway's much icher sovereign wealth fund puts its money into long-term investments outside of Norway to help insulate the Norwegian economy over the long-term from economic shocks like the one that hit Alberta in the 1980s with falling oil prices. The main problem facing the Norwegian economy, in Saunders' recounting, is the country's ongoing labour shortages and the need for immigrants. Alberta doesn't have any problems on that front, at least.
