June 25, 2008

The fjords of Macuro

Juan Cristobal says: - The most developed nation on Earth. The most peaceful country on Earth. Insanely high life expectancy. The second-highest GDP per capita in the world. A near-absence of poverty and income inequality. These are some of the honors bestowed on a little country, with just over 4.4 million people, perched on a bunch of cliffs in the top of the world: Norway.

Thinking through Venezuela's problems is depressing enough, so holding ourselves up to a place like that would only add to our misery. The urge to find a role model to copy is understandable. But, surely, Norway can't be that benchmark. There are no fjords in Macuro. As much as he may like to think otherwise, the guy in Miraflores is no king, just a fat man surrounded by yes-men. And while we have plenty of blondes, let's just say they're not quite Scandinavian.

But face it: we're hard up for a good benchmark. Comparisons with Latin American countries border on useless. Venezuela has more in common with Iran, Algeria and Nigeria than with Guatemala, Peru or Uruguay. Thing is, instead of offering hope, the experiences of our fellow oil exporters serve up a deep well of despair.

It’s no wonder that people resort to near-apocalyptic terms to describe our economy. Some talk about "the devil’s excrement." A Google Academic count on “resource curse” came up with a whopping 36,900 articles. Many of them mention Venezuela.


Thinking through this stuff, it's easy to end up mired in a self-flagellatory funk over our screwed-up national psyche. The conclusion seems inexorable: easy oil money has a lot to answer for. Successive petrobooms have only served up our society to one predatory, authoritarian regime after another, from Gómez to Pérez Jiménez to CAP to Chávez.

But is it is really that simple? Aren't we forgetting that many modern economies, such as Canada, Australia, and Norway, have been built on the back of natural resources? Isn't there something lazy about this blanket denunciation of the petrostate, as though we could just pass the buck to the black stuff under our feet and turn the page?

Oil wealth isn't necessarily a curse. Norway, in particular, is an example of a petrostate that works.

Norway is the world’s third-largest oil exporter, a bigger exporter than Venezuela. It is also the world’s third-largest gas exporter. In spite of this, Norway’s “curse” is nearing its end: its oil and gas reserves are very small compared to other countries, and production is expected to decrease dramatically in the coming years.

So Norwegians, in spite of having lots of oil, have managed to make a nice little country for themselves. What has worked?

A lot of things come to mind: their European mindset, their weather, their history. Yet while some of this may have played a role, it would be a mistake to believe a country's development path is so deterministic. After all, few people fifty years ago would have looked at the mindset, weather and history of Singapore and predicted it was going to become the powerhouse that it is today. It's not all in the genes, under-development is not an inescapable trap.

What has made the difference in Norway, the reason it’s no Nigeria, is that it Norwegians have not fallen into the traps of petrostates. Thanks to mechanisms put in place to isolate the country from sudden oil windfalls, the country is an exporter of diverse goods and services. Contrary to expectations, Norwegians managed to avoid the disease that plagued their Dutch neighbors and was so pervasive that it created its own little economic malaise.

How did Norway do it? One explanation frequently espoused has to do with timing. In particular, countries in which a boom in commodity exporting coincided with the formation of the modern state now exhibit bloated bureaucracies and an inefficient state apparatus, one that makes ad-hoc, arbitrary decisions on economic policy and usually gets it wrong. Norway was the opposite.

Norway discovered its oil in 1962, relatively late in its development. By then, it was an established monarchical democracy. This, however, did not prevent Norwegian politicians from spending the dough.

As documented by Stanford political scientist Terry Lynn Karl in her magnum opus, The Paradox of Plenty, public expenditure in Norway rose just as fast as income from oil exports. Norwegians went on a spending spree in the late 70s and early 80s that rivaled that of the Venezuelan ta’baratos.

Inevitably, the Norwegian economy hit the wall, just like that of other oil exporters. However, that is where the similarities end. As Karl puts it,

“Unlike all other exporters, it (the Norwegian state) established substantial control over petroleum policy on the basis of consensus, protected against the worst excesses of petrolization, and permitted voluntary and relatively rapid adjustment. In effect, its highly institutionalized state structures provided a type of “creative resistance” to the overwhelming impact of the bonanza that was simply unavailable to the developing countries.

The contrast to other exporters from the point of departure – that is, from the discovery of oil on the North Sea shelf – is telling. The structures that “received” Norway’s boom could hardly have been more different from those of the developing countries. Oil companies, especially eager to exploit resources outside OPEC’s dominion, did not encounter a poor country, a weak state, undeveloped social forces, or a predatory, authoritarian ruler… The state in Norway was, in Olsen’s words, a “typical civil servants’ state,” which came remarkably close to what Weber labeled an ideal bureaucracy operating under rational legal authority.”

Karl lists several key features of the Norwegian state structure that allowed it to absorb the oil shock in a sane, rational manner. Recruitment was based solely by merit. Civil servants were unusually insulated from and impervious to influence peddling. Advancement depended on nominations from other (higher-ranking) civil servants. The attempts by political parties and interest organizations to influence the State were frowned upon. Corruption is virtually nonexistent. As Karl depressingly puts it, “this “civil-service state” was the complete antithesis of Venezuela and the other politicized states examined previously.”

In other petrostates, the beginning of oil booms found oil companies negotiating with a rapacious, unequipped, underdeveloped bureaucracy, whose main goal was to establish a tax base. Norway’s bureaucracy had no interest in this. Their emphasis was on regulating the industry correctly, using sophisticated financial planning techniques and tools that maximized collective welfare.

One of these tools is Norway’s Petroleum Fund. This Fund is a mechanism ruled by clear guidelines through which the Norwegian state saves the money coming from extraordinary oil funds for the pensions of future generations. Very literally, it is a way for current generations to use their extraordinary good luck in order to free future ones from the burden of trying to support them.

The Fund’s shadow over Norway’s economy looms large. In 2006, Norway had a budget surplus of a whopping 25.9 percent of GPD. Venezuela, on the contrary, ran a budget deficit that year. That same year, the net assets of the general government were 1.5 times the size of the entire Norwegian economy. To put this number in context, it would equivalent to the Venezuelan government having savings worth $270 billion instead of the roughly $40 billion it has.

The rules of the Fund are simple. Most of the revenue from oil goes into the Fund, which invests the money abroad. The key rule sets the non-oil structural budget deficit of the central government to the fund’s long-term real return, 4 percent.

In other words, it sets spending limits on the government by setting a maximum amount that the government can withdraw from the fund each year, capping them to the “interest” that the Fund earns, so that the long-term value of the fund is preserved. Money goes in the Fund only when the oil market is doing well.

Although it may be tempting to simply copy and paste, it's important to keep in mind that the particular form that these rules adopt is not what is key. Some rules are designed so that the long-term value of the Fund is maximized while short-term cash disbursements are sacrificed. Other rules are more flexible as to the amount of windfall you can spend in the short run. And the rules in Norway are not always complied with to their fullest.

The important thing is that Norway’s fund, like the ones in Alaska or in Chile, is borne out of a consensus among the political classes and civil society as to the economy's medium- and long-term goals and prospects. Countries that successfully cope with resource windfalls (or shortfalls) are those with stable rules that meet some minimum requirements. It’s important to keep this in mind and to understand that consensus and stability are more important than the rules themselves.

The Norwegian example shows us that sudden oil wealth is not the root cause of a country's problems. Oil is not a curse, it's a blessing - it’s what we as a society choose to do with it that makes a difference. And much of this boils down to a series of institutional arrangements and political consensus that should be the main goal of any political party.

Norwegians are not a special race. They live in a remote country that is inaccessible in many places and, while rich in natural resources, is poor in population. Yet through clever institutional design and a little bit of luck, they have managed to do right for themselves. There’s no reason why Norway can’t serve as a guideline to future policy decisions.

So before giving up hope, thinking that we will never be like Norway and that there will never be fjords in Macuro, let's think about what is within our grasp. We would be well served to use the Norwegian benchmark and try and adapt to our own country the principles and setups that have worked for theirs.

Using Norway as a benchmark may sound crazy, but it's better than our current role-model. While the road to hell is paved with good intentions, the road to success is usually built on plans that may appear to some as impossible pipe dreams.

Let's face it - we can't do much worse than we've already done, so what have we got to lose?