Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Analyzing Norway’s Successful Socio-Political-Economic
Situation despite Its Oil Dependence
Antonio E. Morales-Pita* and Jordan Scott**
Norway is an oil producer and exporter country, whose main economic parameters have
not been considerably affected by the plunge in the oil price. This paper analyzes the
reasons why Norway (despite being so closely related to the European Union failing financial
situation and an important oil producer and exporter) has not experienced a financial crisis
up to the end of 2014. Since Norway is the poster child of a welfare state, having one of the
highest GDP yearly per capita in the world – close to $100,000 – the study of its economy
acquires scientific relevance especially in the context of other important oil exporting
countries. The period of study is 2012 to 2014. During this time the oil price per barrel has
fluctuated in the range $110 - $120 from January 2012 to June 2014. Starting in July, the oil
price began to decline and reached $85 in October and less than $50 in December 2014.
The methodology used is a statistical comparison of the economic, political and social
indicators of the major OPEC countries, specifically those related to their dependence on oil,
including an analysis of the management of their sovereign funds. The hypothesis of this
paper is the following: Norway’s successful socio-political-economic situation is not primarily
due to its dependence on oil. The conclusion confirms the hypothesis because Norway’s
economic, political and social performance has not been affected by the oil price plunge in
contrast with the situation of the remaining oil producing and exporting countries
Key words: Norway, Oil Price Plunge, Oil Exporting Countries, Political Economy
JEL Codes: F34, G21 and G24
1. Introduction
Most oil exporters have been adversely affected by the oil price plunge since 2014;
simultaneously, their budget deficits have gone up and their GDP growths are either
slowing or declining. The main OPEC oil exporters have a variety of political systems
ranking from full to flawed democracies to authoritarian regimes, as well as Gini
coefficients ranging from 0.25 to 0.49 (World Bank, 2012) and corruption indexes from
very low to one of the highest in the world (Transparency International, 2014). Norway‟s
solid economic, political, and social indicators have usually been associated with its
production of oil, which represents 70% of the country‟s exports (Pocket World in
Figures, 2015 edition The Economist). The hypothesis of this paper argues
that
Norway‟s successful socio-political-economic situation is not primarily due to its
dependence on oil, but rather on its management of sovereign wealth oil funds in the
context of a mixed market economy with active participation of the government.
The structure of the paper is as follows: firstly, the literature review in which the author
will analyse the major dialogues about Norway in the context of economic, political, and
social factors; secondly, the explanation of the research methodology used in testing
____________________________________________________________________
*Dr. Antonio E. Morales-Pita, Department of International Studies, DePaul University, Chicago, USA.
Email: amorale1@depaul.edu
**Jordan Scott, graduate student, DePaul University, Chicago, USA. Email: jscottcam10@hotmail.com
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
the hypotheses; thirdly, the findings in which the arguments of the paper will be
holistically discussed through: a) comparison of the main oil related economic
parameters of the most important oil exporting countries; b) analysis of economic,
political, and social indicators; and c) analysis of the sovereign funds from economic,
political, and social standpoints; finally, the conclusion will recap the progression of the
paper and outline opportunities for further research. The author‟s contribution to the
subject is a holistic political economy analysis in the comparison between Norway and
the main OPEC countries.
2. Literature review
Amidst the European financial crisis of 2008, the Nordic countries, and especially
Norway, showed good economic, financial, political, and social results. On page one
Scott (2013) stated his hypothesis that Norway has mastered both, “wealth
management generally, and oil wealth management specifically while simultaneously
providing its citizens with a robust social democratic welfare state and government
transparency achieving high levels of sustainable growth and social justice.” Scott‟s
paper analyses general economic and sovereign wealth fund indicators, comparing
Norway with Canada, Saudi Arabia, and Venezuela. The emphasis of this paper
resides in the analysis of the Norwegian Pension Fund. On page 75, Stenstadvoldhe
(1977) states that “the Norwegian Model for production and exporting of oil and gas has
been one of state control but not state dominance. Originally when oil was discovered in
the North Sea Norway designed a completely state-owned oil company by the name of
Statoil. This immediate action was necessary to avoid one fatal extreme of commodity
trade, complete foreign exploitation. This occurs when resources that reside in the
jurisdiction of a particular country are not being sold for the benefit of citizens of that
country, rather by foreign companies. However, the Norwegians had not been involved
in oil trade prior to 1973 and therefore had not developed an economy of scale so this
meant that inefficiencies were inevitable. For this reason Statoil would contract with
private companies allowing them to drill for a price, while simultaneously training its own
employees and investing in the necessary infrastructure.”
Scott (2013) did not uniformly compared the political and social indicators among the
countries he studied. Although he extensively studied Norway, he did not foresee any
economic problem in Norway. Nonetheless, according to recent academic and nonacademic literature, the analysis of the Norwegian model is showing alarming signs of
non-sustainable efficiency, such as a high dependence on petroleum, a two-way speed
economy, a possible bubble in the housing market, a diminishing trend in GDP growth
and productivity versus an increasing average wage trend, an increasing in the work
force‟s laziness and calling sick trends, and a change in culture from “take a little from
the rich and give it to the poor” to “be rich.”
Milne, R. (2014a) presents the following two figures:
Figure # 1 – Unit labour costs
Figure # 2 – Time on the job
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
The preceding figures show that Norway‟s competitiveness (due to its high labour costs
and smaller average annual hours per worker) has been diminishing in comparison with
Sweden‟s and Germany‟s. In other words, while the Norwegian worker is most likely
the least exploited by the capitalists in the world, which is good from the standpoint of
social justice, taking this working class advantage to the extreme may reduce
investment incentives and productivity.
The combination of capital and labour in the economic growth functions has been widely
recognized by economics, including the renowned Robert Solow, and Cobb-Douglas
functions. Consequently, if the reduction of labour is not accompanied by an increase in
productivity, the economic growth will be seriously affected.
Milne (2014a) states that: “Although Norway is doing very well in the majority of
economic-politico-social indicators, it faces the following issues: 1- its economy is more
dependent on petroleum (the business cycles are synchronized with oil); 2- Nordea (the
region‟s biggest bank) expect growth in Norway to slow this year compared with last
year = 1.2 growth; 3- Norway‟s housing market is coming under pressure after a period
of almost uninterrupted price growth; 4- GDP/head has stalled for the past five years.
Norway‟s central bank governor- Mr. Olsen - stated in February 2014 that growth is
being supported by immigration and employment growth, and not by increased
productivity; 5- Jan Kjaerstad, an author, bemoans the evolution of his nation from –
„take a little from the rich and give it to the poor‟- to – „be rich‟- the moral genotype has
therefore changed and the collective drive for a more equitable distribution of wealth
has been replaced by the quest for individual financial gain‟, „change in the work ethic‟ –
getting benefits from the labour agency (without working), high sickness rate (5.5% of
Norwegians are on sick leave approved by doctors > other 33 rich countries (despite a
low unemployment rate of 3.5% and generally good health), they are used to a level of
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
benefits that is too expensive for the day the oil industry dies; > 20% of children over the
age of 16 drops out of school, double the Nordic average. Rather than strive to be more
productive, to work longer hours and to stay longer in school, we see that now it‟s time
to take up more leisure, the dropout rate from high school has increased. The country
needs a crisis for people to realize it‟s time to change gear.”
On pages three and four, Bjornland and Thorsrud (2013), state that, “ a) our paper is the
first paper to explicitly analyze and quantify the linkages between a booming energy
sector and sectoral performance in the domestic economy using a structural model,
while also allowing for explicit disturbances in real oil prices, world activity and activity in
the non-oil sector; b) this is also the most comprehensive analysis to date of the
relationship between energy booms and macroeconomic activity at the industry level in
a resource rich economy.
Our main conclusion emphasizes that a booming energy sector has significant and
large productivity spill overs on non-oil sectors, effects that have not been captured in
previous analysis. In particular, we find that the energy sector stimulates investment,
value added, employment and wages in most tradable and non-tradable sectors. The
most positively affected sectors are construction, business services and real estate.
Furthermore, windfall gains due to changes in the real oil price also stimulate the
economy, particularly if the oil price increase is associated with a boom in global
demand. Oil price increases due to, say, supply disruptions, while stimulating activity in
the technologically intense service sectors and boosting government spending, have
small spillovers effects to the rest of the economy, in part because of substantial real
exchange rate appreciation and reduced cost competitiveness. Yet, there is no
evidence of Dutch disease as experienced in the Netherlands in the 1970s, where the
manufacturing sector contracted. Instead, we find evidence of a two speed economy,
with employment in the manufacturing sector lagging behind the booming service
sectors.”
Wooldridge (2013) indicates that the simple explanation for Norway‟s penchant for state
capitalism is oil (petroleum accounts for 30% of governmental revenues and 2% of the
country‟s value added). Although he refers to the fact that, although Norway is the only
big advocate of human rights, and that the oil wealth has not destroyed Norway‟s
egalitarian spirit, he also recognizes that: a) oil wealth is monopolizing the nation‟s
technical talent, b) property prices are rising by nearly 7% a year, and c) new wealth is
pulling in newcomers from all over the world since approximately 11% of Norway‟s
residents were born elsewhere.
From The Economist, (2013) this author has taken a table comparing Norway with
Sweden, Denmark, Finland, Switzerland, New Zealand, Singapore, the United States,
the Netherlands, Canada, Hong Kong, Australia, Britain, Germany, and Ireland. The
comparison includes rankings in global competitiveness, ease of doing business, global
innovation, corruption perceptions, human development and prosperity.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
It is interesting to observe that: A) Norway occupies the 15 th place in global
competitiveness, 6th place in ease of doing business, 14th place in global innovation, 7th
in corruption perceptions, and 1st place in human development and prosperity. Norway
is lagging behind Finland, Sweden and Denmark in global competitiveness, global
innovation and corruption perception; behind Denmark in ease of doing business, and
farther ahead in human development and prosperity. B) Norway ranks behind countries
with the highest levels of global competitiveness (Switzerland, Singapore, Finland,
Sweden, the Netherlands, Germany, the United States, Britain, HongKong) and ease of
doing business (Singapore, Hong Kong, New Zealand, United States, and Denmark),
but ranks first in human development and prosperity.
The Economist (2014) points out the secrets of the Nordic countries‟ success stories,
which are applicable to Norway, such as:
1) The provision to their people of cradle-to-grave welfare services.
2) The habit of spending more on welfare than they could afford and of relying more
on a handful of giant companies than was wise.
3) The Nordic countries ride themselves on the honesty and transparency of their
governments.
4) Pragmatism explains why the new consensus has quickly replaced the old one
and the continuous upgrading of their model.
5) Their main problems are: a) governments remain too big and their private sectors
too small; and b) their taxes are still too high and some of their benefits too
generous.
6) Norway‟s oil boom is threatening to destroy the work ethic. It is a bad sign than
over 6% of the workforce are on sick leave at any one time and around 9% of the
working-age population live on disability pensions. But the Nordics are
continuing to introduce structural reforms, perhaps a bit too slowly but stolidly
and relentlessly. And they are doing all this without sacrificing what makes the
Nordic model so valuable: the ability to invest in human capital and protect
people from the disruptions that are part of the capitalist system.
7) The combination of geography and history has provided Nordic governments with
two powerful resources: trust in strangers and belief in individual rights. The
Nordics find themselves in leading positions in social trust. Government
decisions are widely accepted.
8) The Nordic combination of big government and individualism is very interesting.
They regard the state‟s main job as promoting individual autonomy and social
mobility.
Milne (2014b) confirms most points mentioned above related to Norway‟s economic
dependence on oil, where investment is concentrated and dropping in the remaining
sectors of the economy, and the weakening working habits of the present Norwegian
labor force. Milne underlines that Norway‟s GDP/capita has stalled for the past five
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
years, as well as the fact that growth is supported by immigration and employment
growth, and not by increased productivity.
The points raised by Milne, Bjornland, Thorsrud, and Wooldridge complement Scott‟s
paper about Norway. They do not refer to any other oil exporting country.
Morales-Pita and Arzola, (2013) analyse the sustainability of the XXI Century Socialism
in Venezuela from economic, political and social standpoints. It concludes that the
serious economic mistakes done by the Hugo Chavez's regime have created huge
problems (extremely high inflation, over dependence on oil exports, systematic
devaluation of the currency, highest crime rates in LA, and high budgetary deficits) that
cannot be solved following the Cuban model, which has proven to be economically
disastrous. The aforementioned authors do a holistic approach of Venezuelan
dependence on oil, but it does not include either other OPEC countries nor contemplate
the consequences of the plunge in the oil price on the world economy.
The scholarly contribution of this paper is the economic, political, and social interactive
analysis of the impact of the oil price plunge on Mexico, Norway, Russia, Saudi Arabia
and Venezuela in the context of different political systems going from democratic to
autocratic countries.
3. The Methodology and Model
The methodology used is a comparison of the economic, political, and social indicators
of the major OPEC countries, specifically those related to their dependence on oil,
including an analysis of the management of their sovereign funds. The hypothesis of
this paper is that Norway‟s successful socio-political-economic situation is not primarily
due to its dependence on oil. The period of study is 2012 to 2014. During this time the
oil price per barrel has fluctuated in the range $110 - $120 from January 2012 to June
2014. Starting in July, the oil price began to decline; it reached $85 in October and less
than $50 in December 2014.
4. The Findings
4.1.Oil dependence of Mexico, Norway, Russia, Saudi Arabia and Venezuela
Giles, C. (2014) presents a comparison of the oil dependence indicators of the main oil
importing and exporting countries. The following table summarizes the indicators of the
oil exporting countries.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Table # 1 - Oil indicators for the five main world exporters
Indicators
Mexico
Norway Russia Saudi
Venezuela
Arabia
Net exports of oil and
13
50
282
321
76
products, 2014 ($bn)
Net exports of oil and
1
9.8
13.5
42.9
36.4
products / GDP, 2014,
%
Oil and gas revenues
32.5
29.3
13.5
89
47
as % of fiscal receipts,
2013
Brent crude fiscal
79
40
105
89
114.5
break-even price for
exporters, 2014 ($ per
barrel)
Sources: FT research; Haver Analytics; Thomson Reuters Datastream; Fitch; Citi
Research, FT graphic
The data analysis of the preceding table shows that Norway registers the lowest Brent
crude fiscal break-even price for exporters, as well as the second smallest percentage
of oil and gas revenues in relation to fiscal receipts, net exports of oil and products in
relation to the GDP, and volume of net exports of oil and products. Consequently,
Norway is less dependent on oil exports/GDP than Saudi Arabia, Venezuela, and
Russia; Norway‟s oil and gas revenues as percentage of fiscal receipts are less than
30% while Saudi Arabia, Venezuela and Mexico register larger percentages. Most
importantly, Norway‟s Brent crude fiscal break-even price for exporters is approximately
50% lower than Mexico‟s, 45% lower than Saudi Arabia‟s, 38% lower than Russia‟s, and
finally 35% lower than Venezuela‟s.
The dependence of exports in relation to other components of the GDP is shown below.
Table # 2 – Structure of the GDP by percentages in 2014
% of GDP
Mexico Norway Russia Saudi Arabia
Private
68.2
40.7
31.5
51.2
Consumption
Government 12.3
21.3
23.8
19.7
Consumption
Gross Fixed 20.5
23.4
25.3
19.1
Investment
Exports
33.3
38.2
47.8
31.0
Imports
33.5
28.5
32.4
22.9
Source: EIU
Venezuela
65.3
16.3
13.8
16.0
16.8
Analysing the structure of the GDP, it can be seen that: a) in all countries exports are
larger than imports; b) with the exception of Russia, consumption is larger than exports.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Norway‟s GDP structure is more balanced because the difference between private
consumption and exports is minimal (less than 2%), while in the remaining countries is
at least 17% and it is very large in Venezuela – close to 50%. This similarity of
percentages in Norway indicates that the domestic consumption and external
dependence are compensated and creates a buffer against sudden demand shocks in
the world economy. The next section of this paper deals with the economic indicators in
the aforementioned countries.
4.2. Economic indicators
Table # 3 – GDP growth in the period 2012 to 2014 and 2015 projections
GDP growth
2012
2013
2014
2015
mean
Standard
estimated projected
deviation
Mexico
3.8
1.7
2.1
3.3
2.725
1.15
Norway
2.5
0.8
2.3
1.1
1.67
0.736
Russia
3.4
1.3
0.6
-3.5
1.8
2.84
Saudi Arabia
5.8
3.8
4.1
3.1
4.2
0.98
Venezuela
5.6
1.3
-3.1
-2.8
1.0
2.69
Norway‟s GDP is more stable with the minimum standard deviation that is consistent
with its high GDP/capita according to Sharma (2013), as can be seen from table # - 4.
The largest fluctuations take place in Russia and Venezuela, which reflect the level of
political and social instability.
Table # 4 – GDP measures
Country
GDP/capita Expected
GDP Projected
GDP
in
US$ growth rate range growth rate for
2014
according
to 2015
Sharma (2013)
Mexico
10,050
4%
3%
Norway
98,080
1–2%
1.1 %
Russia
13,000
4%
-3.5 %
Saudi
20,540
3–4
3.1 %
Arabia
Venezuela
10,810
4%
-2.8%
Sources: GDP/capita –Pocket World in Figures 2015 edition The Economist; Expected
GDP growth – Ruchir Sharma Break-out Nations; Projection for 2015 – EIU.
The comparison between tables # - 3 and # - 4 indicates that Norway and Saudi Arabia
register average GDP growth consistent with their GDP/capita range established by
Sharma, while Venezuela, Russia, and Mexico show GDP growths considerably lower
than the expected GDP/capita 4% corresponding to their GDP/capita.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Table # 5 –Main economic indicators in the period 2012 - 2015
Indicator
2012
2013
2014 est Average
2015
2012projected
2014
Budget balance/GDP
Mexico
-2.6
-2.3
-3.6
-2.83
-3.5
Norway
13.6
10.7
12.0
12.1
8.9
Russia
-0.1
-0.5
0.4
-0.2
-0.9
Saudi Arabia
13.6
6,4
1.2
7.07
-7.3
Venezuela
-14.6
-10.5
-12.7
-12.6
-13.1
Current account/GDP
Mexico
-1.3
-2.1
-1.9
-1.76
-1.8
Norway
14.2
11.0
11.1
12.1
11.7
Russia
3.5
1.6
2.6
7.7
6.0
Saudi Arabia
22.4
17.7
12.7
17.6
2.5
Venezuela
2.9
3.4
0.7
2.3
-1.0
Unemployment
Mexico
5.0
4.9
4.7
4.86
4.6
Norway
3.2
3.5
3.8
3.5
4.1
Russia
5.5
5.5
4.9
5.3
7.1
Saudi Arabia
12.2
11.6
11.2
11.7
11.0
Venezuela
7.8
7.5
7.8
7.7
8.7
Inflation
Mexico
3.6
4.0
3.4
3.7
3.4
Norway
1.4
2.0
2.0
1.8
1.7
Russia
6.6
6.5
10.9
8.0
9.2
Saudi Arabia
3.6
3.0
2.8
3.1
3.2
Venezuela
20.1
56.2
67.4
47.9
39.5
Source: EIU
From the above table, it can be seen that: a) Norway shows the largest surplus in the
budget balance/GDP average and projection, the second largest surplus in the current
account/GDP average and the largest projection, the lowest unemployment rate
average and projection, and the lowest inflation rate average and projection in the
group; b) Venezuela registers the largest deficit in the budget balance/GDP average
and projection, the smallest surplus in the current account/GDP average and a deficit in
the projection, the second largest unemployment rate average and projection, and by
far the largest inflation rate average and projection; c) Russian numbers are closer to
Venezuela, while Saudi Arabian and Mexican data are nearer those of Norway; and
finally d) most indicators show similar but worse data in the projection for 2015 and the
average for all countries, probably influenced by the diminishing trend in the oil price.
The preceding economic analysis confirms Norway‟s favourable situation pointed out in
the analysis of table # - 1, specifically in relation to the lowest Brent crude fiscal break-
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
even price for exporters. The higher prices of oil per barrel calculated for Venezuela and
Russia is a consequence of the deteriorating financial and economic situations.
There is only one indicator in which Norway is not ahead of the other countries, namely
the devaluation taking place in the Norwegian krone (Boyd, S. 2014) as shown in the
following table.
Table # 6 - Depreciation of currencies to the dollar during 2014
Country
Depreciation in relation to the dollar during 2014 (%)
Mexican peso
11.62
Norwegian krone
18.35
Saudi
Arabian 3.75 - 3.76
Riyal
Russian rouble
45.8
Venezuelan
Officially sanctioned exchange rates range from 6.3 t 50
bolivar
bolivars/dollar, but the black market fetches 172 bolivars/dollar
Boyd (2014)
Considering that 81% of Norwegian exports go to the European Union, and 63% of
Norwegian imports are from the European Union, (The Economist, 2014) one reason for
the depreciation of the Norwegian krone is the depreciation of the euro, as shown in the
following figure:
Figure # 1 – Relation USD per EUR
The euro has depreciated in relation to the USD 1.20/1.40 = 14.3% while the Norwegian
krone in relation to the USD has depreciated in 18.35 %.
The foreign reserves in the countries studied in this paper are shown in the following
table.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Table # 7 Foreign reserves during 2014 (in US$ billion)
January
April 2014
July 2014
2014
Mexico
240
239
248
Norway
375
380
400
Russia
500
475
470
Saudi
272
276
277
Arabia
Venezuela
21.3
20.9
21.1
Source: www.tradingeconomics.com
October
2014
258
430
430
279
January
2015
285
490
385
277
21.3
22.0
While Russia has a diminishing trend in foreign reserves, Norway, Mexico and Saudi
Arabia show increasing trends. Russia started 2014 with the highest level of foreign
reserves and finished as the second largest, whereas Norway started with the second
highest level and finished with the largest. Venezuela, while reporting a relatively
constant trend, has the smallest amount of reserves.
It is interesting to analyze the relationship between increase in productivity and average
real wages, which are shown in the table below:
Table # 8 - LABOR PRODUCTIVITY % – AVERAGE REAL WAGES
Labor productivity growth, % Average real wages, %
(LP)
change (ARW)
2012
2013
2014
2012
2013
2014
Mexico
0.5
0.6
0.1
0.1
0.5
0.1
Norway
0.6
0.1
1.6
3.2
1.9
2.0
Russia
2.5
1.5
0.4
7.8
5.2
1.6
Saudi Arabia 1.0
4.5
1.5
N/A
N/A
N/A
Venezuela
3.9
-1.5
-5.0
5.7
-5.8
-7.5
Source: EIU
Given that LP/ARW should be greater than 1, Mexico shows the best results although
both indicators show very low levels. Norway registers higher results in productivity
than Mexico, but its LP/ARW < 1 . Russia shows a decreasing trend both in
productivity and average real wages with the highly unfavourable average ratio LP/ARW
< 3.5. Venezuela definitely experiences the worst situation because labour productivity
not only has a decreasing trend, but it turns negative as of 2013, and the average real
wages are mostly negative as well. Saudi Arabia‟s labour productivity growth is the
highest in the group.
Summarizing a comparison of economic indicators in the five countries, Norway is less
dependent on oil exports/GDP, oil and gas revenues as % of fiscal receipts and its
Brent crude fiscal break-even price for exporters is the least in the group. Norway‟s
GDP is more stable with the minimum standard deviation in the group, while consistent
with its high GDP/capita. Its average GDP growth is also consistent with the GDP/capita
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
range. Norway shows the largest surplus in the budget balance/GDP, the second
largest in the current account/GDP, and the lowest unemployment rate and inflation
both in the GDP average and projection. There is only one indicator in which Norway is
not ahead of the other countries, namely the depreciation, because of its close trade
relation with the Eurozone, whose currency has depreciated considerably. In the period
between January 2014 and 2015, Norway showed an increasing trend in foreign
reserves, starting with the second highest level at the beginning of the period and
finishing with the largest level in the group. Although in Norway the ratio of (labor
productivity growth/average real wage) is <1, the numerator shows an increasing trend,
while the average real wage registers a decreasing one. In 2014, they were almost
equal.
4.3 Socio-political indicators
This paper has shown wide economic differences between Norway and other important
OPEC countries. Undoubtedly, Norway enjoys a much better situation than the others,
which is confirmed by the analysis of the economic and social situation of the oil
exporter countries as shown in the following table (Scott, J. 2013).
Table # 9 – Socio-economic parameters
Country
Tax revenue Budget
as % GDP balance as
2012(Heritage %
GDP
Foundation)
2012-2014
(EIU)
Gini
Human
coefficient
development
World Bank index 2014
estimates
2012
Percent of
Population
below
poverty
line (Index
Mundi)*
Mexico
29.7
-2.83
47
71 High HDI
51.3 *
Norway
42.5
12.1
25
1 Very high
4.5***
HDI
Russia
29.5
-0.2
41
57 High HDI
13.1*
Saudi
5.3
7.07
N/A
34 Very high
25%**
Arabia
HDIq
Venezuela
25
-12.6
39
67 High HDI
27.4*
*Index Mundi taken from CIA World Factbook as of January 1, 2012.
**Kevin Sullivan, Washington Post, January 1, 2013
***newsinenglish.no/2011/05/04/poverty-hits-10-percent-in-oslo
The human development index includes three tiers (life expectancy, education, and
income ranking) from 0 to 1, and is published by the United Nations Development
Programme. The following table includes other social indicators.
As seen from table – 9, Norway registers the highest tax revenue as % of GDP, the
highest budget surplus/GDP, the lowest Gini coefficient, the best human development
index, and the lowest percent of population below poverty line.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Table # 10 – Political parameters: corruption and transparency indexes
Country
Index of Corruption Transparency
(2014)
Open
budget
index 2010
Rank/175 Score/100 Budget
Score
openness
Mexico
103
35
N/A
Norway
5
86
extensive 83
Russia
136
27
some
60
Saudi
55
49
Scant or 1
Arabia
none
Venezuela
161
19
Minimal
34
Source: Transparency International
The analysis of the preceding table indicates that Norway is the most transparent and
less corrupt country in the group.
Table # 11 - Indexes of freedom (Freedom in the World, 2014)
Country
Freedom in the 2014
Index
of
World 2014
Economic Freedom
Mexico
Partly free
Moderately free
Norway
Free
Mostly free
Russia
Not free
Mostly unfree
Saudi Arabia
Not free
Moderately free
Venezuela
Partly free
Repressed
2014
Press
Freedom Index
Difficult situation
Good situation
Difficult situation
Very
serious
situation
Difficult situation
Norway‟s indexes of freedom clearly stand out of those of the oil exporting countries
because it is the only one classified as free, as mostly free in economic freedom and in
good situation in the press freedom.
Table # 12 – Breakdown of indexes of freedom by political rights and civil liberties
Country
Mexico
Norway
Russia
Saudi
Arabia
Venezuela
Freedom in PR (Political
the World rights) 1 the
2014
most
free
and 7 the
least free
Partly free 3
Free
1
Not free
6
Not free
7
CL
(civil
liberties)
1 the most free
and 7 the least
free
3
1
5
7
Partly free
5
5
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Norway‟s ranks in the breakdown of indexes of freedom by political and civil liberties are
also the best in this group of countries.
Table # 13 – Democracy Index 2012 (EIU)
Rank Overall
Electoral
Country
Mexico
(flawed
democracy)
Norway (full
democracy)
Russia
(authoritarian
regime)
Saudi Arabia
(authoritarian
regime)
Venezuela
(authoritarian
regime)
score
Functioning
process & of
pluralism
government
Political
participation
Political
culture
Civil
liberties
51
6.9
8.33
7.14
6.67
5.0
7.35
1
9.93
10.00
9.64
10.00
10.00
10.00
122
3.74
3.92
2.86
5.0
2.50
4.41
163
1.71
0
2.86
1.11
3.13
1.47
95
5.15
5.67
4.29
5.56
4.38
5.88
Norway‟s democracy index confirms the conclusion of the previous political indicators
because: a) it is the most democratic country in the world (rank # 1 with the highest
overall score); b) it reached the maximum score in electoral process and pluralism, in
political participation, in political culture and civil liberties; and c) a score of 9.64 over 10
in functioning of government. Mexico was the second in the group with much lower
scores in all categories.
After analysing the economic, political and social situations of the former oil exporting
countries, it is relevant to study the wealth management policies of each country.
4.4 Oil wealth management policies
The wealth management policies‟ main statistics are shown in the following table:
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Table # 14 – Indicators related to oil wealth management policies
Established
Wealth $ Billion Fund
Transparency Rating (2014)
Mexico
2000 - 4
6.032
Stabilization
Norway
1990- 10
893
Government Pension Fund Global
Russia
2011 – n/a
88 and 79.9
Russian Reserve Fund and
2008 - 5
National Welfare Fund
Saudi
2008 – 4
5.3
Public Investment Fund and
Arabia
1952 - 4
76.2
SAMA Foreign Holdings
Venezuela 1998 - 1
N/A
FIEM
Source: swfinstitute.org
The analysis of the preceding table indicates that Norway has the maximum value in
established transparency rating, the maximum wealth and a government controlled
pension fund. The paper will now refer to the wealth management situation of each
individual country.
Mexico‟s Fondo de Estabilización de los Ingresos Petroleros
The Mexican situation is described by SWFI (2015) “Mexico‟s government finances are
heavily dependent on the petroleum industry. In 2000 the fund was created to lessen
the effect on public finances and the national economy when there are declines in oil
revenues. The fund receives inflow from a special levy on oil revenues.
Fondo de Estabilización de los Ingresos Petroleros (FEIP). The FEIP‟s objective is to
allow automatic fiscal stabilizers to work in the context of a balanced Budget rule. If oil
and non-oil tax revenues are below the amount originally envisaged in the budget
approved for a fiscal year – due to shocks o economic activity, oil prices or the
exchange rate – resources from the Fund can be used to compensate for the short-fall
and therefore allowing expenditures to be maintained at the level that was originally
envisages. The Fund is a mechanism to help insure that every year‟s Fiscal Budget can
be executed as planned”
OECD report on Mexico states, “fiscal policy is highly dependent on volatile oil income.
The balanced budget rule can create a bias for spending oil revenues as they are
earned, especially as transfers to the stabilization funds are limited by caps at low
levels. This can potentially lead to a pro-cyclical bias in fiscal policy. Revenues have
also been lower than they could have, if gasoline prices had adjusted with international
prices instead of a price smoothing mechanism for the domestic price. The system also
benefits mostly well-off consumers and has important environmental costs. To better
manage budget cycles and oil wealth, Mexico should establish a structural deficit fiscal
rule. To improve transparency oil revenues should be reported in gross terms in the
budget. A price mechanism that leads to a closer alignment between domestic and
international gasoline prices should be adopted and other energy subsidies eliminated
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
and an energy excise tax introduced. To reduce dependence on oil revenues and
prepare for the exhaustion of oil reserves, further tax reform is needed to cut
exemptions and broaden the tax base. A rapid and adequate implementation of the
reform of the state oil company is required to boost oil revenues, increase efficiency and
investment in future exploration. While the recent reform passed by congress is
expected to improve governance and allow Pemex to use performance based contracts,
its implementation is key.” OECD (2009) p 49.
Since Mexican government finances are heavily dependent on oil prices, there is a
misalignment between domestic and international gasoline prices, and tax reforms are
facing difficulties in their implementation, the general situation of the Mexican oil fund is
not stable. On top of that, the recent scandals of corruption in the current Mexican
government and the political unrest due to the assassination of more than forty students
last November have created additional instability in Mexico.
Norway‟s Wealth Fund
(Scott, 2013, pp. 14)
“One of the integral aspects of the Norwegian model is its highly effective
sovereign wealth fund. Even though, as can be seen in Table 14, each of the
countries in question has a sovereign wealth fund, the Norwegian sovereign
wealth fund is by far the most mature most well organized, and best functioning.”
(Scott, 2013, pp.15)
“The Norwegian Government Pension Fund was begun in 1990 and derives its
financial backing from oil profits. With total assets of 715.9 billion USD it is the
largest sovereign wealth fund in the world. It is also the only fund on our list that
scores a 10 out of 10 on the Linaburg-Maduell Transparency Index (LMTI), an
index that rates the potential for corruption of sovereign wealth funds. Its
investment strategy is tailored to the long-term and it puts a large portion of its
assets in fixed income and equities. It also allocates up to 5 percent to
international real estate. By taking the long view the Norwegian government has
transcended “playing politics” so that he sovereign wealth fund is a guarantee no
matter what political party is in power. It has used the fund to stabilize fluctuating
economics situation and the fund is big enough to weather more than just a
“rainy day,” it could stand a hurricane, perhaps two. One other aspect that I think
speaks less to the economic side of things and more to the social justice side is
the commitment of the fund to ethical guidelines for its investment. „The
guidelines restrict investment where there is a risk that a company is involved in
activities that can contribute to violation of human rights, corruption,
environmental damage, or other particularly serious violations of fundamental
ethical norms‟ (swfinstiute, 2013).”
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The functioning of the Norwegian Government Pension Fund is doing well.
Russia‟s reserve funds
Russia has two wealth funds for oil: the Russian Reserve fund and the Russia National
Welfare Fund. The Russian economic, financial, and political situations are experiencing
specially rough times due to the collapse in the oil price and the rouble since the last
quarter of 2014. Rosneft is the largest state-owned oil industry in Russia. Mufson
(2014) writes that: a) Rosneft has a debt-laden balance sheet due to intense borrowing
to support ambitious investment plans in the Arctic, West Siberia and the Gulf of
Mexico; b) the Russian sate-owned oil company Rosneft is one of the main targets of
the latest U.S. economic sanctions; c) Anders Aslund, a former economic advisor to
Russia and Poland, states that Rosneft is in reality out of the capital market; d) Rosneft
will be unable to turn to Euopean banks in its transactions in dollars; and e) Rosneft
could face steep payments if it loses a case at the International Court of Arbitration in
the Hague involving the Russian government‟s seizure of the oil giant Yukos in 2003 of
Mr. Mikhail Khodorkovsky, who wa funding opposition parties in Russia.
Guriev (2014)
“In October, Rosneft issued $11 billion worth of ruble-denominated bonds (an
unparalleled amount for the Russian market, equivalent to 70% of the total value
of corporate bonds issued in Russia this year). The coupon on these bonds was
actually 1.5 percentage points below sovereign bonds of similar maturity, which
is also unusual, especially given that Rosneft currently is subject to Western
sanctions.
Rosneft, borrowed about $40 billion in 2013 to buy its competitor, TNK-BP. About
$10 billion of this debt has to be repaid in the fourth quarter of 2014, including a
$7 billion payment on December 21 ($20 billion more will have to be repaid in
2015).
Given that the price of oil is likely to remain low, Asian financiers – even the
Chinese – do not seem eager to refinance Russian companies, and sanctions
are unlikely to be lifted, investors clearly wanted a bigger and bolder solution.
Rosneft had repeatedly asked for $40 billion from Russia‟s sovereign wealth
fund. But, with that money already committed to other purposes, the government
opted for a non-transparent and non-market-based solution that would have
made Gerashchenko proud.
Unfortunately, this solution poses several immediate problems. For starters, the
risk of Rosneft defaulting – as well as the cost of providing subsidized loans –
rests with the bondholders. If the bondholders are indeed the largest state-owned
banks, the deal actually hurts the banking system: it increases the concentration
of risk and implies additional losses from buying bonds with below-market
interest rates.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Second, because Rosneft must repay its external debt, it is likely to use its
bailout cash to buy dollars, which can only result in further downward pressure
on the ruble. Rosneft has denied this publicly, but the markets nonetheless seem
to expect that the newly printed rubles will flood the currency markets.
Third, the non-transparent structure of the deal undermines trust in the CBR‟s
integrity and independence. The day after Black Monday, Minister of Economy
Alexey Ulyukaev said that the CBR should have increased interest rates sooner.
This immediately raised suspicion that the CBR delayed the interest-rate hike in
order to complete the deal at the lower rate.
Finally, this bailout fails to answer the question it was supposed to address.
nvestors do not know whether the Rosneft bailout is a one-off deal and, if it is
not, which companies can hope to receive similar treatment from the CBR. Thus,
they do not understand how (and whether) Russian corporate debt will be repaid
or refinanced – or how much trust they can place in the ruble.”
Consequently, the situation of the Russian sovereign wealth funds is as unstable as the
economy as a whole.
Saudi Arabia
(Scott, J. 2013) pp16
“Saudi Arabia is the only country that has two different funds. The first one called
SAMA Foreign Holdings has a huge amount of assets 532.8 billion ad is the
fourth largest fund in the world. Unfortunately, the formation of this fund is
limited. It concentrates on investing mainly in „low risk assets, such as sovereign
debt instruments‟ (swfinstitute.org, 2013). Alternatively, the public Investment
Fund has significantly less assets but its restructure in 2008 makes its essential
functions and strategies similar to that of the Norwegian fund. This is a great
step in the right direction for Saudi Arabia and goes to reaffirm the concept of the
Norwegian Model. It will be critical for Saudi Arabia to concentrate on wise
investment and siphoning more money into its Public Investment Fund so that it
can continue to make progress,. The biggest issue with both funds is the LMTI
ratings of only 4, well below the recommended rating of at least 8. It will be
critical to make both funds more transparent in order to limit corruption so that it
is ensured that the assets are put toward the public good.”
Although the Saudi Arabia is experiencing lack of funding and low LMTI ratings, it is
taking progressive steps in the attempt to follow the Norwegian model.
Venezuela
(Scott, 2013)
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
“The Venezuelan sovereign wealth fund FEM seems to be in even worse shape.
Established in 1998 for macroeconomic stabilization it has struggled to build
assets reaching only 800 million. The president has “decision making powers”
and “expenditure decisions” by decree leading to high levels of corruption.
Indeed it has the lowest rating possible on the LMTI, a 1 out of 10. This fund
could benefit from a decentralization of decision making power, increased
revenues from the oil industry, and an overall less corrupt government
overseeing its function.”
The worsening of the economic and financial situation, and its over dependence on oil
makes the Venezuelan fund the least efficient of the group.
In summary Norway‟s oil wealth fund is the most stable and best run of the five oil
exporting countries analysed in this paper.
5. Summary and Conclusions
The paper has proven the hypothesis that Norway‟s successful socio-political-economic
situation is not primarily due to its dependence on oil because: a) Brent crude fiscal
break-even price for exporters is at least 50% lower than Mexico‟s, 45% lower than
Saudi Arabia‟s, 38% lower than Russia‟s and finally 35% of Venezuela‟s; b) it has the
second smallest percentage of oil and gas revenues in relation to fiscal receipts, net
exports of oil and products in relation to the GDP, and volume of net exports of oil and
products; c) Norway is less dependent on oil exports/GDP than Saudi Arabia,
Venezuela, and Russia; d) Norway‟s GDP is more stable with the minimum standard
deviation in the group, while consistent with its high GDP/capita. Its average GDP
growth is also consistent with the GDP/capita range; e) Norway shows the largest
surplus in the budget balance/GDP, the second largest in the current account/GDP, the
lowest unemployment rate and inflation both in the GDP average and projection; f) in
the period January 2014 – 2015 Norway shows an increasing trend in foreign reserves
starting with the second highest level at the beginning of the period and finishing with
the largest level in the group. Although in Norway the ratio (labour productivity
growth/average real wages) < 1, the numerator shows an increasing trend, while the
average real wage, a decreasing one. In 2014 they were almost equal; consequently,
the ratio trend is getting closer to being > 1.
From a social standpoint, Norway – in consistency with being welfare state - registers
the highest tax revenue as % of GDP, the highest budget balance/GDP, the lowest Gini
coefficient, the best human development index, and the lowest percent of population
below poverty line. Norway‟s political situation confirms its highly favorable political
supremacy in the context of these countries in the indexes of corruption, transparency,
freedom and democracy.
In summary Norway has proven to be efficient economically, socially and politically
when the oil price skyrockets and when it plunges; therefore, its success is primarily due
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
to the fact that Norway‟s oil wealth fund is the most stable and best run of the five oil
exporting countries analysed in this paper.
As shown in this paper, however, Norway is not exempt from economic issues such as
oil wealth monopolizing the nation‟s technical talent, b) property prices rising by nearly
7% a year, and c) new wealth pulling in newcomers from all over the world, since
approximately 11% of Norway‟s residents were born elsewhere. On top of that, Norway
should improve global competitiveness, ease of doing business, and global innovation
in order to attract foreign investments. At the same time, it is interesting to observe that
Norwegian growth is supported by immigration increase in employment rather than by
increased productivity which lags behind real wages. These issues are subject to be
researched and solved in future scholarly and scientific undertakings.
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