Norway managed to avoid it for several decades. Will the resource curse still hit us?

The money allocations must not be more than the drops of sweat.

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When a country discovers a valuable natural resource, one option is to keep the discovery a secret, throw away the map and leave the valuable behind.

This strange sentence is a possible lesson from a very famous article by Jeffrey Sachs and Andrew Warner from 2001. They showed that countries that in 1970 had a high proportion of natural resources in their exports experienced poor economic growth per population over the next 20 years.

That this has been an important insight – and an influential article – is more than suggested by the fact that Google Scholar states that it has a whopping 6,416 citations. That is a very high number.

For a long time, however, it seemed that Norway could be an exception. Why – and how does it look now?

Large incomes can displace cleverness and determination

To answer, we have to take a look at what can go wrong when a country finds a valuable natural resource.

The short answer is that the discovery can affect behavior and work. The somewhat longer answer will point to the fact that it becomes tempting to position oneself closely to those who have power over the cash flows instead of being innovative, hardworking and skilled.

In professional terms, we call such an activity “rent-seeking”. Large natural resource revenues will then displace cleverness and will. This is how the resource discovery becomes – precisely – a curse.

The curse can take various forms, such as corruption, power struggle, waste and over-generous politics.

In economics, we know that natural resources are not decisive for how a country does, which shocks many. How can oil, gold, diamonds, forests, coal, minerals not matter?

It is not that the resources do not matter. Rather, it is the case that there are other – safer and more lasting – paths to welfare and prosperity.

The workforce is a country’s most important resource

The smartest thing a country can do is acquire a competent, healthy and willing workforce.

Take Japan: There they have few natural resources, yet the country is right at the top when it comes to economic delivery. Take Brazil: They have a lot of natural resources there, but deliver far from as well economically. (If you become interested in this, you can go to the World Bank’s website and look at “natural resources rents”)

The core of these two examples cannot be overlooked. Natural resources are less important than innovative and committed labour. This is so important that I say it again:

The workforce is a country’s most important resource. And it is about educating it, making it willing to change, getting it creative and stimulating it to perform.

When natural resources destroy growth

A discovery of a valuable natural resource can influence how and how much work is done.

Sachs and Warner said in their article that one possible mechanism through which the curse works is precisely displacement activity. They formulated themselves as follows (my translation): “Natural resources displace activity x. Activity x drives growth. Therefore, natural resources will destroy growth.”

The reader sees that there is something obvious about the hypothesis. It says that what makes a country capable is weakened by the discovery of natural resources, and therefore the country becomes less capable. Yes, says the reader, what else? Because something must be weakened when the country’s economic capacity is weakened?

The explanation is similar to the one that says “Kari runs fast because she moves her feet fast”. It is correct, but not very suitable as a source of understanding. One must drill deeper. And it has been done – and is being done – without us going into details and discussions here.

Because in any case, we understand that when a country finds something as valuable as oil, temptations can arise for those in power. And there we are on to something.

When Norway avoided the curse

It is probably of decisive importance how those in power view the discovery of natural resources, and to what extent they feel personal ownership of it. If they immediately plan colossal castles and huge arenas, it is more unfortunate than if they plan to put the income from the find in financial positions that will benefit the country’s future generations.

Norway has done something right here.

In meetings with interested academics abroad, I have pointed to the Norwegian Ministry of Finance, because in my mind it is at the very top of the world. And the reader can be pleased to hear that as early as 1974 the Ministry of Finance wrote insightfully about the oil discovery in the North Sea in 1969. You can read for yourself, look up Stortingsmelding 25 (1973–1974) “The role of the petroleum industry in Norwegian society”. You will quickly warm to the heart.

Today – 50 years later – we have a sort of conclusion. Norway was able to handle these gigantic income streams because they were largely kept outside the mainland economy. They were placed in ownership positions abroad.

So one possible recipe for avoiding the resource curse is to protect the country so that it retains innovation, willingness to change and desire to work.

However, it is an important point that even though we have had sky-high incomes, they are still small compared to the importance of the workforce.

In the Perspective Report from 2021 (Stortingsmelding 14 2020-2021) it is shown on page 94 that work effort makes up 74 per cent of national wealth. The financial capital (read: Oil Fund) amounts to 10 per cent. Read it one more time. And then one more time.

Norway’s national wealth is therefore mainly our working hours. The national accounts show that we have four billion hours, and we have positioned ourselves so that they are skilled and forward thinking.

But. There is a “but” here, and hopefully the reader will be curious. I’ll get to that in a moment. We will first look a little more at why we managed to avoid the resource curse – beyond having a clever Ministry of Finance.

Sensible policies still exist

Favorable factors were knowledgeable politicians, robust institutions, high trust, a good sense of community, clear transparency in state administration and an acceptance of long-term thinking. It is likely that several well-organized countries could have managed it, because such countries make it difficult for individual groups to usurp the income.

Also remember that the oil didn’t just seep up from the sand. It required high-tech engineering for extraction. So, because oil is so difficult to find, we have actually stuck with high-tech knowledge, and not just received easy dollars.

We also managed to carve out the rule of action, a political-intellectual triumph which must be one of the best examples of how socio-economic insight via sensible politicians leads to practical politics. Perhaps it was a greater achievement than the decision to place the income abroad, because there are probably not that many countries that had managed to do just that.

And not enough of that. Sensible policies still exist. Recently, we have had a pension reform which once again shows that in Norway it is possible to carry out useful reforms after long-term thinking. No one should say that populists with bloated slogans and short-term plans have won in Norway.

The relentless bookkeeping

Fortunately, many Norwegian politicians have realized that there is a budgetary condition. The best way to see it is to talk about rub.

Rub was Professor Trygve Haavelmos – winner of the Nobel Memorial Prize in Economics – term for the fact that you are forced to be within the budget condition.

The abbreviation stands for “the relentless bookkeeping of the real economy”, and says that it is not possible to give three people half a share each.

Grants must add up – and every time you grant something to someone, someone else gets nothing. And now it is more useful to think in hours and minutes rather than kroner and øre.

It is the real resources that must add up, money can always be printed. It is precisely because rub works, that money printing does not work. It’s banal, and can hardly be called an insight, but let me give you a challenge. Pick up a newspaper and see if you think everyone has a good relationship with rub. You were considered, yes.

Is Norway so immune to the resource curse?

Well. I wish I could answer “yes”.

The municipal reform and the six-hour day are a joke

It has looked promising for many decades, but part of the job description for economists is to be concerned. So I should be worried. What worries me is that wealth can do something about our ability and will to work and our ability and will to carry out sensible reforms. The danger is that we think we are richer than we are.

An example of the latter – for me – has been the municipal reform. Or rather: lack of reform. The municipal structure suggests that we feel we have become so rich that we can afford to continue with expensive ways of running the country. Because we can. Because we can afford it. Because we don’t need to change anything.

There are economies of scale in municipal administration. Imagine ten town halls, ten mayors, ten municipal councils, ten school administrations, ten crisis teams and ten budget processes. Then imagine that these ten of each can become one of each. Yes, then you have just imagined economies of scale.

The attentive reader will object that there are also diseconomies of scale as well, and rightly so. Well seen. Therefore, the favorable number of municipalities in Norway is not one. We do not know exactly how many are the most favorable, but that we have many, no one can doubt that.

It is also ominous that there is symbolic politics in name, identity and belonging, so that people carve their opinions in stone, so that they will last until Dovre falls. Norway has three and a half times as many municipalities as Denmark. And don’t make a big deal about it being because Norway is so big and far. That’s not enough. It is people who must be organised, not forest and stone. The Danes are better – perhaps because they can’t afford anything else.

It is also possible that the resource curse turns out to mean that we think we are disconnected from the need to work, i.e. that we forget Haavelmos rub. Then we will live in the fantasy that work is not that important.

Take the six-hour day as an example. It can quickly reduce Norway’s working hours from four billion to 3.2 billion. Okay, maybe some people want to work a little harder and others get sick a little less often. Maybe someone will work part-time as before. But. I. Sum. Becomes. The. Expensive. It will shrink our national wallet.

Money and sweat

It is beneficial to have two thoughts in your head at the same time – and balance them. Yes, when we are rich, we can take more time off and have generous welfare schemes. No, even if we are rich, we have to work and reform overly generous welfare schemes.

Rub says that if we have four billion working hours, we will not be able to meet demands that require five billion working hours. And again, for those who like a challenge: just open any newspaper. The needs are screaming and the wishes numerous. More police. More teachers. More nurses. Better roads. More defense. In which version of the world do we seem to need fewer working hours?

However, the main scenario is still that Norwegian politics is knowledge-based, and that Norway will be at the top of the economic world even in three decades. Whether we manage to do that probably depends on our ability to handle artificial intelligence – but that’s a whole other article. We stand strong.

Can we say for sure whether Norway escapes the resource curse? No. Overall, the country is relatively well put together. Do we have potential for improvement and any worrying trends? Oh yes. And one thing is always wise to ponder, and that is a nuance of the poet Aasmund Olavsson Vinje’s words that “money is congealed sweat”.

Let me suggest: The money allocations must not be more than the drops of sweat.