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Tuesday, 18 December 13:26 (GMT -05:00)



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Norway: is crude oil good or evil? How to avoid “resource curse”?


 

Is crude oil good or evil when it comes to a country’s economic potential? In late April the Russian Prime Minister Vladimir Putin made an annual report to the Russian Parliament. Reacting to the global oil boom he said that Russia shouldn’t waste the benefit of growing oil prices. The report raised another wave of discussion in the media about the threat of the so-called “resource curse” (the correlation between a country’s considerable profits from the export of energy sources and its weak economic development, which is expressed in the form of an economic slowdown, a decline in the competitiveness of the other economic sectors, currency devaluation, inflation and unemployment growth). Experts say that there are many countries around the world that haven’t got enough benefits from the export of energy sources.
 

In the meantime, there are many examples of strong resource-exporting economies: Canada, USA, Australia and Norway.

Norway: a “Northern miracle” through the eyes of statistics
 
On the one hand, Norway doesn’t have anything special to constantly attract the world media:
·         It is the most Northern European country: 1/3rd of the country’s territory is situated within the Polar circle
·         The least populated European country (4.9M people).
·         2/3rds of the territory are covered with mountains and lakes. That is why most Norwegians travel by plain. 
·         In the 1950s Norway was considered the poorest European country
On the other hand, Norway is currently considered one of the most developed and successful countries of the world:
·         It comes 2nd in terms of natural gas export (after Russia) and 6th in terms of oil export. It was the only country to retain the budget surplus in 2009 (9.9% of the GDP, mostly at the expense of its crude oil exports).
·         The rate of saving is 25%-30%. In this aspect Norway has been sharing the 1st place with Japan and Finland since the end of WWII.
·         It is the world’s 6th richest country in terms of GDP per capita ($59 100). For comparison sake, the USA occupies the 10th place.
·         For many years Norway has been called the world’s best country to live in (including the income level and the quality of education).
The Norwegians are not in a hurry to join the EU. They seem to be self-sufficient and welfare.
So it is not accidental that Norway is number 1 in the rating of the most welfare countries (by Legatum, Oxford Analytica and Gallup World Poll Service). There is temptation to consider crude oil to be the main reason for Norway’s welfare. 10 years of high commodity prices and favorable economic situation… it seems to be not a “recourse curse” but a “resource blessing”.
 
Norway: a “northern heaven”


 

 

 

Of course, the global economic crisis affected Norway as well. However, as compared with many other countries, it came out of it relatively “unscratched”. In 2009 the country’s economy declined 1.8% (for the 2nd time since WWII). The unemployment rate reached 3.5% (the record of the last couple of decades). However, many other developed countries cannot even dream about such results. The recession period was a brief one. Yet, the country’s economy seems to keep showing stable growth. In other words, Norway remains one of the most successful countries in the world.
 
So it is interesting to know the reason for this Norwegian miracle as well as the factors that ensure the stability of its economy. These are some of them:
·         Abundant natural recourses. Norway is quite rich in natural recourses – crude oil, natural gas, iron ore, copper, zinc, nickel, uranium, silver, gold, titanium, fish, timber, hydroelectricity (the country comes 1st in terms of the production of electricity per capita).
·         Well-thought-out economic policy. The main peculiarity of the Norwegian economy is that it is mixed, i.e. it is the combination of the free market and governmental regulation including:
-          Considerable public sector employing every third citizen.
-          Strict bank regulation
-          Control over the country’s key economic sectors: crude oil production, fishing and agriculture. For example the government owns 71% of the shares of Statoil, which is the largest national oil company, thanks to which they can control 60% of the entire Norwegian oil and gas markets.
-          Well-developed industries, including shipbuilding, heavy engineering and others. But the way numerous waterfalls give Norway an opportunity to produce relatively cheap energy (99% of all the electricity is produced by hydroelectric power plants). Of course the gas and oil industry is still the basis of the Norwegian economy. However, Norway is one of the leaders in information technology (IT) and in terms of the production of pure energy (solar, wind and water energy). In other words, Norway is among the most competitive economies of the world.
 
·         Export-oriented economy. Taking into account the fact that Norway’s domestic market is tiny, its economy is oriented towards exporting products and resources (for example Norway consumes only 5% of the gas it produces). Almost 90% of the produced paper and cellulose is exported as well. Norway exports fish to almost 140 countries around the world. By the way 90% of the salmon imported by Russia comes from Norway. And finally, believe it or not, Norway is the world’s leading exporter of ostriches. It is not accidental that the Norwegian merchant fleet is the 5th largest in the world.
·         Norway’s small-scale and medium-scale businesses represent a considerable share of the country’s economy (99,6%). Over 70% of the working population is employed in the sector.
·         Favorable business environment. Norway can boast Europe’s best business environment. For example anyone opening his/her own business in Norway   can address the Norwegian Industrial and Regional Development Fund to get a free “development grant”. Moreover, as a businessman you don’t need to pay taxes until you gain your feet i.e. until your earn a certain amount of money. It is easy to start a business. All you need is to send the necessary documents by mail and wait. By the way, it is very difficult to become bankrupt in Norway due to governmental support and affordable loans. Norwegians spend least of all on licenses, registrations and customs formalities. The relations with tax service and other public institutions are absolutely transparent. The level of corruption is very low even though sometimes it seems that corruption and crude oil are inseparable.
·         Taking into account Norway’s fundamental position (it is one of the world’s most solvent countries) and good perspectives as compared to most Euro countries, numerous experts say that Norway may become a new “safe heaven” for many of those who invest in Europe. At least the Norwegian T-bond yield is slightly higher than the German one.
·         Tourism development. Even though the country is situated in the same latitude with Siberia and Alaska, Gulf Stream makes the Norwegian climate relatively mild. Moreover, according to the National Geographic Traveler, the Norwegian fjords currently present more interest for tourists than the Egyptian pyramids and the Great Wall of China: Norway’s pristine environment, crystal lakes and rivers, blooming valleys and hundreds of ethnographic museums do make the country attractive for tourists from around the world (5-6M tourists a year). Moreover Norway is one of the best places for fishing and skiing.



 

Crude oil and natural gas.
Crude oil and natural gas industries provide 36% of the taxes and 51% of the export proceedings. Moreover, the oil wealth is distributed and used wisely. Here are the main distinctive features of the Norwegian energy policy:
In 1971 (or a couple of years after oil was found in the Norwegian part of the North Sea) the Norwegian parliament adopted a new energy policy based on the statement that the country’s natural resources (and crude oil in particular) should belong to the people. They created a national oil-producing company. The Government Pension Fund of Norway was founded as well. This is the biggest pension fund in the world - $450B. In reality it is not a pension fund but a fund created to separate sovereign wealth funds in order to ensure Norway’s high living standards when the oil reserves are exhausted (including the profit from oil exports… For example, Statoil gives 78% of its profit to the government). It appears that the money gained from the Norwegian oil export is isolated from the country’s economy. The fund invests only in foreign securities from around the world (60% is invested in stocks, 40% is invested in bonds). The country already owns 0.8% of the net amount of all the securities issued around the world. As you may guess, Russia lent the idea of the Russian Stabilization Fund from Norway. However, the Norwegian government spends almost no money for domestic needs (only 4-7% of the money is allocated for Norway’s budget spending). Of course not all the Norwegians like this “stinginess” because the country still has a lot of problems to solve. The fund is under constant public control: oil companies are obliged to publish income, tax, bonus and investment reports, which are inspected by some international auditing firm.
Norway is mainly exporting oil products, which makes it possible to gain the max profit. Before the crisis the investments in oil-and-gas sector were increased by 15%. This year the government is going to invest the record amount of $25B.
It appears that it would be ridiculous to regret being blessed with abundant reserves of natural resources. The thing is how effectively they are used and distributed.
 
Norway: a “social heaven”

 

 

 

Norway is referred to as a prosperous country. The average income is €4000, the average pension is €1500. Norway has managed to create almost a perfect social state with high social guarantees. Thanks to the progressive tax scale, there are no poor people and almost no rich people. The government pays $5000 each time a child is born and then deposits a certain amount of money to his/her account every year. The working day usually lasts from 8.00 till 15.00 (not more than 37hrs a week) as the Norwegians know that people need a good rest to work well. The unemployment benefit is paid for 2 years (2% of the previous income).
They also take care of their environment. The secondary and higher education is free. Students get scholarship. The medical service is also free. 9% of the budget is spent on healthcare. If a Norwegian family spends €500 or more on medicine, the costs are compensated by the government. Norway is also a heaven for the old and retired.
In principle, this is a country of considerable social spending, so it should have been one of the first countries to fall prey to the global crisis. However, as we can see, it didn’t happen. Skeptics say that Norway can afford spending big money on social benefits and guarantees (for example the population of Russian is 30 times as big as Norway’s one but the Russian oil deposits contain only twice as mach crude oil as those located in Norway). Moreover, Norway spends only 1,9% of the national GDP on military outlays.
 



 

The peculiarities of the Norwegian mentality
The Norwegians are true patriots. They feel proud for their country, its nature and state system. They like to be useful to the society. That is why almost all of them are members of some clubs, parties and organizations. The Norwegians are emotionally reserved, unhurried and sedate. That is why some foreigners say they can be boring. Most of them are honest and law-abiding. They are sporty and tolerant, self-respecting and self-sufficient.
 
 
 
 
 
 
 
 
The weak spots of the Norwegian economy.

 

 

In the light of all the above-mentioned the natural question arises: are there any problems in the Norwegian economy? In fact, there are some. Yet they are rather serious:
·         Resource-based economy. Crude oil and natural gas extraction remains the basis of the country’s national economy. Norway is dependent on crude oil even more then Russia. Moreover, the peak of oil production was reached in 2000. The production volume has been declining ever since. This year the volume is expected to decline by 6%. The old oilfields of the North Sea are being gradually exhausted. Moreover, the gas and oil stocks are overvalued by 20%. The companies have to develop hard-to-reach gas and oil fields, which proves to be much costlier.  Without oil export the country’s budget would be deficit-ridden. Some pessimists say that Norway’s oil deposits will be exhausted within a decade.
·    Severe climate, short vegetation period, short and cold summer and low fertility of the soil restrain the development of agriculture. Only 3% of the land is suitable for cultivation. Despite the generous subsidies the farmers get from the government, 60% of the consumed food is exported.
·   High taxes. Considerable budgetary spending and costly social security system cannot do without high taxes, which are nearly equal to 50% of the national GDP. The Norwegian taxation system is rather tough while the taxes are some of the highest in the world. The average rate of the income tax is 28%. Most Norwegians spend over 1/3 of their monthly income on various taxes and duties. The taxes are progressive: those who earn over €4375 a month should pay an extra tax (9%), €7100 – 12%. The corporation tax is 28% (Gas and oil companies pay 50%). There are many other taxes and duties (gasoline tax, alcohol tax etc.). In return investors get high-quality service, modern infrastructure, transparency, stability and security.
·   Lack of skilled personnel. Norway constantly lacks qualified labor power, especially managers. The thing is that skilled workers need high salaries. That is why many companies employ less skilled specialists to pay less.
·    Catastrophic population ageing. The amount of the old and retired people in Norway is rapidly growing, which requires more social spending. The problem could be partially solved by attracting migrant laborers. But Norway’s emigration policy is very tough (one of the toughest in the world). However, the number of emigrants grows every year. Over the last 10 years over 510.000 foreigners have received residence permits. The Norway authorities are afraid that the emigrants may exceed the critical amount.
 
So, does Norway really have chances to survive without crude oil? Yes, of course. The country’s economy is quite diversified. Moreover, the Norwegian authorities know about their “Achilles' heel” and are getting ready for the “post-hydrocarbon” period.
 
Market Leader and Masterforex-V Academy offer you to participate in a survey at the forum for traders and investors:
When will Russia, Ukraine and Belarus achieve Norway’s level of development and social standards?
·         In the near future
·         In the distant future
·         Never
 
 

 

 

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