0

Poor Little Rich Country

Feeling sympathy for Norway is hard. Thanks to its massive North Sea oil reserves, the country has achieved a level of wealth unimaginable only a generation ago - and which has allowed it to cold-shoulder the European Union since 1994. But Norway's problems, while hardly on a par with Sub-Saharan Africa or Afghanistan, are nonetheless serious enough to elicit concern, if not pity.

When a country's newly discovered natural resource abundance leads to windfall wealth, investment in the rest of its economy shifts away from the tradeables sector (mainly manufactured exports) and into the nontradeables sector (mainly consumer goods and services). The diagnosis is a familiar one known as "the Dutch disease." If and when the natural resource generating the windfall wealth (in this case, oil and gas) disappears, the economy is left with too few competitive industries and too many empty bookstore-cafes. Painful restructuring is sure to follow.

So far, Norway has avoided the worst pitfalls of the Dutch disease by using its massive oil revenues to establish a national savings scheme, the Petroleum Fund, which is permitted to invest only in foreign assets. This rule serves to curb inflationary demand pressure while preventing elected officials from squandering the country's riches on politically rewarding but economically wasteful projects. On both counts, however, Norway has recently lowered its guard and is heading for trouble.

Wages throughout the economy have soared, with the average increase likely to hit a whopping 6% this year. To compensate, firms have been raising prices, fueling inflation. But with the central bank committed to holding annual inflation to an average of 2.5%, Norway's interest rates are currently among the highest in Europe.