Posts Tagged 'Norway'

The Norwegian Oil Fund

By Halvor Mehlum, Kalle Moene, and Ragnar Torvik.

The Norwegian Petroleum Fund was set up in 1990. The aim of the fund was to ensure a sustainable use of the income from the petroleum sector. The rationale for establishing the fund was that the return on financial assets was expected to be higher and less variable than the return on oil in the ground. The first payments into the fund were made in 1996, and from then on the fund has accumulated rapidly. At the present moment the fund is among the biggest sovereign wealth funds in the world. The total value of the fund is about 512 billion USD, which is somewhat more than the annual GDP.

 

All the proceeds from the petroleum sector to the state enter into the fund. This makes it transparent how much the petroleum sector contributes to public finances. The parliament each year then decides on how much should be transferred from the fund to the running government budget. In 2001 parliament decided on guidelines saying that the transfers out of the petroleum fund should normally equal the long run rate of return from the fund, stipulated at 4 percent. Thus the guidelines domestically referred to as the “decision rule”, implies a sustainable use where one does not tap into the wealth in the fund. In fact, the use of the rents increases as the size of the fund increases. Not only is the use sustainable, it implies a scaling up of the use of oil money with time (as oil in the ground does not count in the wealth). The use will follow a path such that the use of oil rents reaches its highest level when the oil era is over and no more oil cash flow enters the fund. From then on the entire oil wealth is transformed to financial wealth while the 4 percent rule is expected to provide a stable predictable flow for all future period.

 

In the initial years the transfer from the fund exceeded 4% of the fund, but in recent years this gap has narrowed and the transfers from the petroleum fund is now in accordance with the guidelines.

 

The day to day management of the fund is delegated from the Ministry of Finance to The Central Bank of Norway. The Ministry of Finance specifies how and where the fund is allowed to invest, and designs ethical guidelines while the Central Bank manages the fund.

 

The Norwegian petroleum fund ensures that (i) transparency in how much income the petroleum sector contributes, (ii) transparency in how much of the fund is used each year, (iii) the fund is integrated in the budget process (unlike for example in Alaska, where the fund operated independently from other government budgets), (iv) the management of the fund is based on professional economic decisions at the same time as satisfying ethical guidelines, but (v) still the fund is under democratic public control.

 

Interestingly, at the same day as the “decision rule” was announced, the monetary policy was shifted to an inflation targeting regime. One implication of the inflation targeting mandate of the Central Bank was that the interest rate had to be increased as soon as the Central Bank perceived that there was about to be pressure in the economy. Vocal voters, among them families with mortgages, would be very unhappy with interest hikes. As a result the policy makers soon learned that they would lose voters if there were reasons to blame them for generating excess pressure in the economy. In the public debate breaking the “decision rule” has been the yardstick when evaluating the soundness of fiscal policy.


 

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Qatalum and Labor Rights.

By: Magnus Gravem

April 12th 2010 Qatalum aluminum plant opened in Qatar. This is the world’s biggest aluminum plant and a 50/50 joint venture between the Qatari company Qatar Petroleum and the Norwegian company Hydro. 5.7 billion USD has been invested in this project, and over 56.000 laborers from 86 different countries have been directly involved in the construction of this plant.

The grand opening of this plant was a major happening, and the guest list included royals, ministers and other VIP guests from Norway, Qatar and around the world including Qatar’s Amir Hamad bin Khalifa al-Thani and Norwegian Crown Prince Haakon.[1] Both the official Qatar and the official Norway were present to celebrate this event.

There are certainly many possible benefits for both Qataris and Norwegians with the creation of this joint venture. However, it also should raise some questions of how a Norwegian company should act in a country with a poor history in the field of labor rights.

The situation of the expatriates working in Qatar is not what is considered appropriate in Norway or most other Western countries. Hydro’s CEO and President, Svein Richard Brandsvæg indicated that Hydro was not fully satisfied with the situation of the labor force that built this plant. Thus the situation of the laborers building Qatalum cannot have been within Hydro’s standards of labor rights. According to Norwegian media, Norwegian minister of industry and trade, Trond Giske, had discussions with Qatari political leaders with the aim of improving the situation of the expatriates in the country.

Hence, the situation of expatriates in Qatar, including the expatriates at Qatalum, is not considered acceptable by Norwegian standards. Despite this, the Norwegian company chooses to do business in this country with what seems to be fully supported by Norwegian authorities. Since labor rights is one of the cornerstones of the ethical considerations of the Norwegian government for Norwegian companies,[2] this would indicate that instead of supporting this collaboration, Norwegian authorities could, or should, have been a lot more critical. It has also been surprisingly quiet from the press in this matter, even though the coverage of the opening was extensive.

On the other side, however, it could also be discussed how the best way to actually change the situation of the labor force in Qatar really is. It could certainly be argued that doing business in a country with a labor force without any political powers or rights could be unethical. However, the approach it would seem that Norwegian authorities, and Hydro, have taken in this particular case is a more diplomatic approach: Change through dialogue and collaboration. It could easily be argued that this is a more efficient way to change this situation, and to create a better situation for the expatriates in Qatar. Hydro has an extensive description of how they try to ensure acceptable working conditions in Qatalum on their homepage.[3] These efforts include competitive salary, free housing, health and social services for the employees and their families.

Since this project is high profile and a major investment for Hydro, it will be extremely interesting to see how the Norwegian company will work for continuously improving the situation of the expatriates working for them in the future. It will also be interesting to see if Norwegian authorities will increase the pressure on Qatari authorities to ensure the very same thing.


[1] www.hydro.com

[2] in Report to the Storting No. 10 2008-2009

[3] www.hydro.com

On the impact of oil richness for the Norwegian economy.

By Halvor Mehlum, Kalle Moene, and Ragnar Torvik.

On average the economic performance of resource rich countries has been hampered by their natural resource wealth. Natural resources have in many cases been a curse rather than a blessing. The discovery of oil in the North Sea, however, stimulated productive forces rather than grabber activities partly because of the high quality of institutions and partly because of the technological challenges of oil extraction offshore.

There is evidence that countries with a high quality of institutions turn natural resources to an asset rather than a problem. In countries with good institutions, such as good protection of property rights and little corruption, natural resources seem to contribute to growth. More natural resources provide private agents with productive investment opportunities, in turn creating positive externalities for other agents. With poor protection of property rights and much corruption, however, more natural resources may hamper growth. In such countries with dysfunctional institutions, more natural resources may stimulate predation, rent-seeking and other destructive or non-productive activities, in turn creating negative externalities for the rest of the economy. Hence, we call this theory the curse of institutions. While the growth effect is negative in countries with bad institutions, we show that the growth effect of resource abundance is positive in countries with good institutions. In countries with good institutions there is no resource curse. For Norway, in particular, resource abundance has stimulated growth rather than retarded it.

In addition to the institutional aspects related to rule of law and property rights, a likely reason for Norway’s positive development is the early industrialization and late oil discovery. Moreover,  when Norway became oil rich, it already had a long and stable tradition of democratic rule. It also had a well functioning state bureaucracy. All this contrasts with many of the other resource abundant countries in the world today, countries which are neither democratic nor bureaucratically efficient. Wasteful activities were thus held in check by democratic governance, based on broad political representation with checks and balances in civil society.

In the era from 1900 onwards, more and more of the Norway’s natural resources were utilized. This was also an era of increased political participation. The extension of the franchise, and broad geographical and class representation in the political system, created many veto players resisting any attempt of resource grabbing by narrow interest groups.  In turn, the industrialization which the resources generated implied a growth in the labor movement, and it was in the interest of this labor movement to promote a political system ensuring that the resource wealth benefited broader groups of the population. Thus, when the oil era came, the institutions of Norway were already well prepared to ensure that also this resource wealth would be to the best of the population. In addition, new institutions and arrangements were created to ensure a sustainable use of the resource wealth.


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