Norway’s Version of the Resource Curse

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

• Most impressive, it is the world’s #2-ranked nation for high-quality rule of law.
• It is in the top quartile of countries for economic liberty.
• When measuring non-fiscal factors, it is in the top-10 percent for economic liberty.
• It is ranked #11 in the world for total human freedom.

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.

More than a fifth of its working age population relied on unemployment or sick-leave benefits throughout 2016, according to a study by the Norwegian Labor and Welfare Administration, or NAV. With welfare payments up 3 percent in 2016, the growing dependence will likely make it harder for Norway to wean itself off oil and gas production. While the discovery of petroleum 50 years ago…helped make the world’s most generous welfare system possible — declining resources…means that the country will need to find other legs to stand on to keep up its standard of living.

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).

But I’m digressing. Let’s close by observing that development economists sometimes write about a “resource curse” that exists when politicians feel they can impose lots of bad policy because it is easy to generate revenue by selling natural resources.

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.