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


Background: 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: 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 Lessons from White Paper no. 25 (1974)


Norway fairly successful — so far: 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): Scandinavian GDP per capita (1999 USD, PPP) Data from BLS (2003), Table 1, http://bls.gov/fls


Norwegian trends and policies: Norwegian trends and policies Early debates (started before 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


Coping with highly unpredictable revenues: 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


Net cash flow from petroleum extraction (percent of GNP): Net cash flow from petroleum extraction (percent of GNP) 1980 1999 Source: St meld nr 1 (1997-98)


We did not avoid cyclical development!: We did not avoid cyclical development!  GNP  GNP Mainland Norway Annual growth rates of GNP Source: Fig 9, SSB Notater 2003/43 Oslo 2003


Managing the rise in revenues: 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): Three ways to spend the oil revenue (percent of Mainland Norway GNP) Saving Spending Using real return of financial assets Source: Chart 3.12 in Report No. 30 to the Storting (2000-2001)


Norwegian petroleum wealth (percent of GDP): Norwegian petroleum wealth (percent of GDP)


The Norwegian Petroleum Fund: The Norwegian Petroleum Fund 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: 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


A fund may be lost in lower growth rate: A fund may be lost in lower growth rate Years


Importance of transparency and pluralism: Importance of transparency and pluralism 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


Exchange rate management: Exchange rate management 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?


Summing up: Summing up 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


Coordination with aid flows?: Coordination with aid flows? 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