Oil Doesn't Stink
Norway is considered a role model both as a market economy and social nation. The Nordic fairy tale of a great deal of money, smart policy and double standards begins like this: Once upon a time there was a wise decision…
The journey takes hours by ship through the Oslo fjord. Before reaching the capital, the ferry passes by countless islands and hundreds of kilometers of coastline. White wooden houses appear one after the other atop cliffs overgrown with vegetation. The land rises steeply from the harbor; privately owned sailboats and motorboats cruise through the cool, dark-blue water.
If you want to understand Norway and its people, this is the best way to approach Oslo – over the sea from Denmark or Germany to the south. From the deck of the ship it becomes clear how much the country and its residents are influenced by water and nature.
And you get an idea of their wealth.Impressive single-family homes surround the harbors with extensive gardens and large yachts floating in the water at the jetties.
Economist Arne Jon Isachsen called his homeland the "richest country in the world" because of its large oil and gas deposits. Even the luxurious new buildings on Oslo's coast, which you can see when the ferry sails into the harbor, sell easily even though the prices are substantially above the city's already high average cost of more than 6,000 Swiss francs per square meter.
With an annual per capita income of about 77,500 Swiss francs, Norway ranks second in the world behind Luxembourg (Switzerland: 63,700 Swiss francs), while the income gap is so low that in Western Europe only Denmark compares according to the OECD, the organization for industrialized nations. At the same time, the government also has savings of around 160,000 francs per capita (status as of July 7, 2015).
The money is invested in the Government Pension Fund Global, also known as the Oil Fund. The government-controlled fund, which invests the money in stocks, bonds and real estate, is fed by revenues from commodity exports. "Establishing the fund was one of the wisest decisions ever made by the Norwegian government," says Professor of Economics Erling Steigum.
The Norwegian government has been investing revenues from oil – i.e., income from oil taxes and ownership interests in oil fields and Statoil, the country's largest raw materials and energy company – abroad in oil funds to save for the future since 1996.
Norway was once a poor country with a harsh climate and one primary export: fish. A country couldn't get rich that way in the decades after the Second World War, so Norway – unlike Switzerland – was still not a member of the league of wealthy countries by 1970. In terms of purchasing power, the income per capita was not even half as high as in Switzerland and about 15 percent lower than in the Federal Republic of Germany.
Norway is now one of the world's biggest oil and gas exporters and earns billions from its natural resources, which are located primarily in the North Sea near the cities of Bergen and Stavanger. "I can still remember when the first oil was found at Christmas in 1969. We were all excited to see what Norway would do with it, but no one suspected that it could become such a big business," says Erling Steigum, 66, who teaches at the BI Norwegian Business School in Oslo.
Politics of Reason
Norway is now regarded as a role model for how reasonable politics can prevent the tragic fate of countries rich in natural resources: the resource curse and Dutch disease.
There are poor countries like Nigeria where the general public never fully benefits from the wealth of natural resources due to pervasive corruption. "But Norway has well-functioning institutions and was able to significantly increase the standard of living rather than succumb to this resource curse," says Steigum. The anti-corruption NGO Transparency International lists Norway together with Switzerland as number five in the ranking of the world's least corrupt countries.
Norway was also able to avoid what is known as Dutch disease, in which other sectors of the economy suffer because the local currency appreciates steeply due to commodity exports and nearly all investment flows into one sector. This phenomenon was observed after natural gas was found in the Netherlands in 1960. In Norway, a large part of the oil revenues are converted into foreign currencies and then invested abroad through the oil fund.
Since 1970, the year after oil was found, the Nordic Kingdom has climbed up the OECD list of countries with the highest income per capita in purchasing power from 18th place to 2nd.
Meanwhile, the fund is worth more than seven trillion kroner (830 billion Swiss francs) – twice as much as Norway's gross domestic product. No other sovereign wealth fund is this big. According to the Sovereign Wealth Fund Institute, the funds in Abu Dhabi (730 billion) and Saudi Arabia (715 billion) are the next largest. Like these countries, Norway is having difficulty with today's low oil prices and the economy is hoping for another upswing. But even if this raw material, which Norway possesses in such abundance, does not reach the 100-dollar mark again, Norway will still be in a significantly better position than the rest of Europe, thanks to the oil fund.
Characteristically Norwegian: Robustness
"I did not expect such a large amount when I was Finance Minister and we made the first deposit on May 31, 1996," says Social Democrat Sigbjørn Johnsen nearly 20 years after that memorable day. He's sitting in the old east train station, Oslo's Østbanehallen, drinking green tea. "The first payment was
1 billion 981 million kroner..." Johnsen reflects for a moment. Then he recites the whole number smoothly: "It was 1,981,128,502 kroner and 16 øre, I believe. Yes, 16 øre" (at that time just under 400 million Swiss francs).
Johnsen radiates the robustness that is typical of many successful Norwegians. He has long been a member of the country's political elite, but he doesn't make a fuss over himself. He shows up to the meeting with a small backpack rather than a briefcase and takes almost two hours out of his day.
It's just a few hundred meters on foot from the cafe where we're sitting to Oslo's new opera house. It's located directly on the fjord and is a symbol for both Norwegian prosperity and their balanced attitude. Like the oil fund, the opera house clad with precious snow-white Carrara marble is there for all Norwegians. The Snøhetta architecture firm made the roof an accessible space to give access also to the taxpayers who are not interested in music. "Nothing is for sale up on the roof," said Kjetil Trædal Thorsen, the lead architect on the project, at the grand opening in 2008. The government ensures that the public receives many benefits financed by taxes – regardless of their income. In addition to the magnificent views from the publicly accessible roof of the opera, these include free university education and health care.
Sigbjørn Johnsen is now the Prefect of Hedmark province north of Oslo. He is one of the people who have shaped Norwegian policy since the oil boom. He was Vice-Chairman of the Finance Committee when the oil fund was established in June 1990. In addition, he served as Finance Minister from the end of 1990 to 1996, and again from 2009 to 2013.
As recently as the 1970s, the Norwegian government used oil revenues to maintain the economy on credit, says Johnsen. Back then a government-commissioned report recommended: "out of consideration for future generations [...] to invest outside the country [...] in order to keep reaping benefits after the petroleum business is done." Because the idea for the oil fund was proposed here for the first time, Johnsen considers this a key document in Norwegian history.
Only after oil prices rose rapidly in the 1980s did revenues become large enough to be able to consider saving them. By the beginning of the 1990s, Norway had freed itself from its net foreign debt and a savings vehicle was within reach. "When we finally decided in Parliament to establish the fund, it was no big deal because a large majority supported it," explains Johnsen.
Despite its name, the fund is only used to support the government budget in general. Four percent of the volume – the anticipated returns – may be withdrawn annually. This is currently around 30 billion euros. However, the government will only use about 2.6 percent in the current year.
Learning from Norway
The fund will probably never grow so large that Norwegians will no longer have to pay taxes or social security contributions. If the oil stops flowing in a few decades and money still drains from the fund into the state budget, then growth will slow or stop entirely. But thanks to the oil money, Norway has much less to fear from demographic change and high pension expenditures than other countries.
However, rather than making provisions for future generations, the government could have bestowed more bounty on today's voters. Whether a country decides – as Norway has – to think long-term or spend the money here and now depends primarily on the institutional and political circumstances that exist there.
"The more domestic political conflicts there are, the more difficult it is to save for the future," says Martin Skancke. He oversaw the oil fund for many years under Johnsen and other finance ministers and is now an independent consultant specializing in sovereign wealth funds.
East Timor, Papua New Guinea, Kazakhstan, Cyprus, Libya, Lebanon, Myanmar: The list of the countries he has advised is long. His objective is to help other countries that are rich in oil or other resources to benefit from Norway's experience.
"If a sitting government must assume that any money it saves will be spent by the opposition if it should come into power, then naturally incumbent politicians prefer to spend the money themselves now and win over voters," he says. In Norway, politicians from all parties can rely on the fact that political opponents will not plunder the oil fund, should there be a change of government. According to Johnsen, this is due to social consensus. In Norway, the gap between rich and poor has never been as extreme as in other countries, and the differences between political parties are also more minor than elsewhere. "This is what enabled saving in the first place," says Skancke.
Only the Progress Party (FrP) rejected this consensus and wanted to spend a larger part of the oil money domestically, for example on the healthcare sector. When the FrP started participating in the government for the first time two years ago, party leader Siv Jensen was appointed Finance Minister. Since then, the FrP also prefers to save; otherwise it would not have been able to forge a coalition with the Prime Minister's Høyre party.
Traditionally, the fund holds a high proportion of stocks, which has grown over the years and now amounts to 60 percent. Because the fund is so large, the Norwegians now hold 2.4 percent of all listed European stocks. In Switzerland, the fund owns a high stake in Nestlé – it holds 2.7 percent of the capital, more than in any other company measured in Swiss francs – as well as Credit Suisse (5.7 percent) and Novartis (1.9 percent).
The fund has also been investing in real estate since 2010, as proposed by a commission led by economist Steigum. The fund has acquired interest in property in the heart of Paris, the Rond Point on the Champs-Élysées, and Regent Street in London, one of the best-known shopping streets in the United Kingdom, to name just a few. The contrast to the powerful oil fund's unspectacular Bankplassen office in a quiet corner of Oslo could not be greater: The building can hardly match the top real estate purchased by the fund.
Live Wealth Counter
From the outset, the fund has been very transparent. An annual report has been published since the beginning, listing which stocks and bonds the fund held on December 31. A few years ago they also added a live counter to the fund's website, www.nbim.no, that calculates what the fund is worth right now. The value can rise and fall by hundreds of millions of kroner in a matter of seconds. "I always like to watch that," says former Finance Minister Johnsen.
The counter aims to help citizens get an impression of their country's wealth. But Trine Otte Bak Nielsen, for example, says, "I didn't know anything about it," adding "We don't think much about the fund, but of course we know that it exists and how privileged we are in Norway to have it." The 37-year-old lives with her family in a two-room apartment in a five-story red brick building. The small apartment is well-situated. It's only two stops on the subway to downtown and the botanical garden; a swimming pool and the Munch Museum where Nielsen works as a curator are a two-minute walk away.
Real estate prices in Oslo have risen sharply in recent years. So, just as the Norwegian government is building wealth for its citizens with the fund, they in turn are investing in residential property.
When Norwegians get together, they often talk about real estate prices. The oil fund, on the other hand, is rarely a topic of conversation. "Naturally the fund and the security that we in Norway enjoy because of the social wealth may have an unconscious role to play. But that we as a young family are thinking about buying a new, larger home is not a direct result of the fund," says her husband Samson Valland.
The fund regularly attracts international attention because it divests itself of stakes in companies if, for example, they are involved with child labor or the production of cluster bombs. A Council of Ethics evaluates the companies. Those excluded include Lockheed Martin, Boeing and Airbus due to their participation in nuclear weapons production, Walmart due to human rights violations, various tobacco companies for health reasons as well as mine operators due to environmental issues.
The fund managers are committed to being an active investor, but not an activist one. They vote at annual general meetings – and not always in line with recommendations. However, the fund operates in silence. It does not try to compel companies to take action with high-profile campaigns, nor does it engage in industrial politics by forcing mergers, for example.
Norway lives by the motto, "Do good and talk about it." This is happening, for example, in the far north on Svalbard, a group of islands significantly closer to the North Pole than Oslo. It is three hours by air from the Norwegian capital to Longyearbyen, the largest town on Svalbard.
The local airport is not much more than a paved runway with a terminal the size of a highway rest area. A few hundred meters away as the crow flies is the Global Seed Vault – an underground bank for plant seeds inside a mountain.
Seeds in the Permafrost
Norway doesn't just retrieve oil and natural gas from underground, it also stores valuable natural resources there. "We don't want to set up a museum here. We are building a library of plant seeds to enable new cultivation and plant varieties," says Brian Lainoff. The fundraiser for the Global Seed Vault is standing all bundled up in the extremely cold space. A vast variety of seeds for diverse crop plants has been stored here since 2008. These may be used if climate change or disease required the cultivation of new varieties in order to produce food. In Rwanda and Burundi, these types of seed banks were destroyed during political unrest.
Like the oil fund, the Global Seed Vault is a type of pension fund. However, the stores in permafrost are an insurance that ideally will never be needed, while the fund yields money that Norway spends.
The seed insurance project has garnered Norway a great deal of respect. The Guardian, Vice and Le Figaro are just a few of the media outlets that have reported on the facility. Less well-known is the fact that coal – one of the most damaging energy sources for the environment – has been mined on Svalbard for nearly a century. However, the Norwegian Parliament decided in June 2015 that the oil fund can no longer invest in companies that operate a significant portion of their business with coal.
According to a study by Greenpeace and other environmental organizations, at the end of 2014 the fund had just over 10 billion euros invested in companies that account for 23 percent of global coal production. That coal is still being mined on Svalbard is a typical Norwegian double standard, say critics like Rasmus Hansson of Norway's Green party. It also fits that the fund, which is fed by oil revenues, invests in environmental technology to greenwash its image. But you can also see it as that famous "first step." The fact that high profits are not the only objective for investments somehow seems characteristically Norwegian.