Nova workboard

a blog from young economists at Nova SBE

How did the Vikings exorcised their paradox of plenty?

It’s not unusual for some natural resources, especially the non- renewable ones, to be extremely abundant in certain countries. These resources often become the main source of income. At first glance this may sound extremely beneficial for the economy: explore the goods upon which you have an advantage! However, more often than not, problems appear along with something called the Paradox of plenty, also known as resource curse: regions and countries with abundance of natural resources often reveal worse development results and lower economic growth.

The potential impact that these resources could have had on the economic prosperity falls far short on the observable.

Why does this happen? The main reasons are easily appointed:  Rent seeking activities, conflicts, corruption, over reliance on exports of raw resources, resource taxation, export revenues that result in increases of the exchange rate, leading to lower competitiveness (the Dutch Disease) and bad quality of government institutions.

But then again, it comes as no surprise when it actually does happen:

Congo is rich in diamonds and gold, and yet has the lowest GDP per capita in the world. With an average of GDP annual growth rate of 0.67%, it achieved its lowest value in 1961 through a record of – 26.10%. Conflicts and bad government resulted in approximately 49 million people living under the poverty line. (Banque Central do Congo);

Mozambique has the capacity to produce over 100 million m3 of natural gas per year, which would place it on the top 10 of countries with the largest extraction worldwide. Such amount of future income could, for example, boost government revenues, increasing the additional investments in infrastructure, health, creating jobs and improving the general standard of living. Mozambique now ranks the bottom of the United Nations Human Development Index, in 178th out of 187;

Russia, Venezuela, Saudi Arabia, are just some of the countries in a list that insists in not ending.

So what’s so special about a little Kingdom in northern Europe?

The massive oil discovery in Norway took place in the 60’s, and although it was firstly explored and fully financed by private companies such as Philips Petroleum Company, it was soon taken over by the Norwegian government. Contrary to what we would expect, that poor, austere economy prospered: GDP is growing at a relatively fast pace since the 1970s, turning the Viking’s Land into one of the richest economies in the world. In 2012, the oil sector represented 23% of GDP, 30% of government revenue, 29%of total investment and 52% of exports (Norwegian Petroleum Directorate).

“Not every country has Norway’s DNA.” Said Jan Isaksen, an economist focused on poverty and development. Rare are the countries with such a strong institution, highly educated workforce with Lutheran work ethic, and never forgetting, free of corruption. This unique starting point gave the Norwegian economy an opportunity to thrive, and gave the governors what they needed to transform a so common curse in a blessing. In fact, they managed to apply a specific tax system to the oil sector that allowed them to recollect, in addition to a 28% tax rate over the profit of all oil companies, an extra tax of 50% over the sector. Therefore, the government collects 78% of the revenues from the oil companies.

This tremendous high value seems to make consumers and producers worse off. The introduction of the tax results in dead weight loss and the decrease of welfare. Nonetheless, companies still have incentives, operating in the system becomes extremely attractive, and consumers seem to be very happy with their situation. All because of Norway’s institutional wonders: The social state actually compensates for the loss they were suffering.

So as you can see, the answer doesn’t lay in the barbarian Nordic DNA. Transparency and credibility of governors and institutions may lead the way!

Izaura Pires de Carvalho

Author: studentnovasbe

Master student in Nova Sbe

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