Norway, Alaska and Alberta are broadly recognized as having managed their oil resource wealth relatively effectively, particularly in regards to having avoided the “resource curse” – a seemingly counterintuitive situation in which the economies of countries with substantial natural resource endowments fare worse than those of their non-resource-rich counterparts.
Each of the three has established various savings funds that receive a portion of their income from natural resource revenues. Alberta has $17 billion in its Heritage Savings Trust Fund, Alaska has $47 bln in its Permanent Fund, and the $737 bln in Norway’s Government Pension Fund comes out to almost $150,000 for each of its 5 million people.
“But the successful accumulation of wealth brings about its own challenges,” said Scott Goldsmith, Professor Emeritus of Economics at the University of Alaska Anchorage, at the USAEE/IAEE North American Conference in Anchorage, Alaska this week. These include distribution across generations, whether resource wealth should be used as a tool for economic development, and what policies can help to maintain the discipling required to manage these funds as oil production declines.
Speakers at the USAEE/IAEE North American Conference identified specific challenges to management of their governments’ savings, some of which seemed closely linked to conflicts political and economic imperatives.
Norway: Welfare vs Infrastructure
Norway’s government has managed to keep spending under control, “but what they have very little control over is how the money is spent”, said Rognvaldur Hannesson, Professor at the Norwegian School of Economics.
“Expenditures on disability and sick leave have increased almost exponentially over the last 15 years or so, whereas expenditures on infrastructure – roads and railways, things like that – at least what is spent by the central government has been fairly stagnant,” said Hannesson, joking that Norwegians appear to be twice as sick and disabled as Swedes.
Hannesson identified one of the goals of Norway’s petroleum fund as avoiding unsustainable welfare payments. And while the volume of savings it has accrued from resource wealth suggests its finances are in good shape, it is not yet clear whether its welfare payments will prove sustainable over the long run.
“Disability and sick leave payments is off-limits to all political parties. No political party dares take up this issue.”
It is unclear whether Norway’s management of its oil wealth may be undermining long-term investment in the country’s economy.
“There is a grain of truth in saying that we’ve been saving this oil money at the expense of investing in our own infrastructure,” Hannesson said.
Alaska: White Elephant Investments
Alaska has taken in more than $105 bln in cumulative resource revenues since 1977 through vehicles like production taxes, petroleum property taxes, corporate income tax and royalties. “Virtually all of the government expenditures – 85% – have come from oil rents,” said Gregg Erickson, Co-Founder and Editor-At-Large of the Alaska Budget Report.
The state had around $60 bln in savings as of the end of fiscal year 2012 – most in the permanent fund, with some in other savings vehicles, such as the constitutional budget reserve – and many of its investments have been productive, such as those in infrastructure. But “there is a wonderful litany of white elephant investments”, said Erickson.
He cited the Delta Barley Project, a project to grow barley in central Alaska. While it failed to invigorate the state’s agricultural industry, wild buffalo found it extremely tasty, he said. “It turned out to be a famously poor investment.”
Alberta: Spending the Savings
Alberta has managed to accumulate impressive savings in boom times, but has also spent a great deal of it in tougher economic periods, and has not yet settled on a set of rules governing its funds. “I am hardly impressed by the province of Alberta in terms of its utilization of natural resources,” said Melville McMillan, Professor Emeritus and Fellow of the Institute of Public Economics at the University of Alberta.
Alberta’s Heritage Savings Trust Fund, established in 1976, held $11,000 per capita at its peak, and now has around $3,700-$3,800 a head, according to Melville. The Sustainability Fund, established in the early 2000’s, had $16.8 bln in 2008-09, and ended last year at around $2.8 bln. “It is essentially depleted,” said McMillan.
While distributions from funds that are intended for savings may be necessary at times, it is easier to start paying people than to stop. “People get accustomed to lower taxes or higher services. It’s very hard to break that aspect.”
