December 17, 2011

Norway's Butter Shortages and the Dreaded Dutch Disease

Matt Yglesias in Slate, noting the recent shortages of butter in Norway, gives a nice explanation of the predicament that energy-exporting states find themselves in after receiving a fat windfall from oil and gas profits. The butter crisis, which will soon be eased as the Norwegian government relaxes its high tariffs on imported butter, is not "a simple lesson about the virtues of free trade." Norway's protectionism responded to a very real problem:

Norway got rich through the discovery of offshore oil and gas reserves, a bonanza of natural resource wealth. But with such wealth can come problems, most notably the so-called “Dutch Disease” that afflicted the Netherlands after its own fossil-fuel find. A capital-intensive industry that employs relatively few workers became a major export industry. The high volume of natural resource exports pushes up the value of the currency and makes it cheap to buy products from abroad. This, in turn, tends to put all domestic producers of other tradable goods out of business and leave your economy dangerously dependent on the fluctuations of the commodity markets.

In principle, economic orthodoxy would say not to sweat it. Just use the natural resources to generate government revenue, then engage in massive redistribution. To many, though, there’s something depressing about the idea of a whole nation living on the dole. What’s more, many Persian Gulf states who’ve de facto taken this approach have realized over time that it creates problems. Your country is rich, superficially, but it lacks the human capital and organizational skills typical of a modern developed country. When the oil runs out, what will you be left with?

Protecting select product markets from international competition has, for this reason, played a major role in Norwegian economic strategy. The inefficiencies involved in blocking foreign butter are minor at most times, can be relaxed in an emergency, and preserve some kind of non-oil economic base for the future.

The largest Norwegian effort in this regard, however, is something more innovative. A large share of the oil revenues, rather than subsidizing current government operations, is invested via the Norwegian Government Pension Fund, which is thought to own approximately 1 percent of the publicly traded stock in the world. In part, the purpose of the fund is, as its website says, “to safeguard and build financial wealth for future generations,” but this could be accomplished by directly giving the funds to Norwegians instead. The real purpose of holding the wealth in a fund that invests exclusively abroad is to limit the appreciation of the krone in international currency markets and maintain Norway’s industrial competitiveness. What it has in common with the butter tariffs, however, is that Norwegians are accepting lower living standards than they might otherwise enjoy for the sake of a long-term strategy of not becoming a Saudi-style oil monoculture.

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