Nature's Evil

Norway has trillions of dollars in its Sovereign Fund, and they all came from oil and gas. The government can spend no more than 3 per cent of the fund’s annual returns on pensions and other needs; any other expenditure must be approved by a full vote of Parliament. The fund sold all its shares in tobacco companies, recently got rid of coal companies, and has promised to sell its oil shares. But Norwegian corporations are working flat out, pumping fuel from the seabed, selling it, expanding production and paying wages to its workers. Most of the energy that Norway uses domestically comes from its hydroelectric plants. The overall result is that foreign consumers burn Norwegian oil and gas, polluting our common atmosphere and bringing no benefits to the country’s citizens. But since the nation locks up its resource income, the citizens rely only on their labour – and they are doing well. Norway’s previous experience as a resource economy helped it to reach this unorthodox solution. Two hundred years ago, Norway was a poor country and dependent colony; the sources of its income – fish, timber, grain – were diffused and not susceptible to monopoly. Is the decisive role in development played by pre-existing resources rather than by pre-existing institutions, as political commentators think? And would it not be better if oil simply remained in the earth rather than polluting the planet, and then keeping people busy ‘sterilising’ its profits?

The history of economic thought did not foresee anything like the ‘sterilisation’ of huge streams of income, which are comparable in value with national revenue. The classical economists could never have imagined that the crucial question of the new era would be exactly the opposite of theirs: how to take wealth out of the economy? Since this extra wealth has already been created, would not it be better to share it out equally among all citizens? This is how a similar fund in Alaska works – it pays out an annual dividend to all Alaska residents. Calculated through a transparent formula, the amount fluctuates between $1,000 and $2,000 a year. Created in 1977, the fund has a lot of experience and little bureaucracy. In Russia, the Stabilisation Fund was created in 2004 following the Norwegian model. Its aims were similar – the sterilisation of the income from gas and oil. However, the Russian fund lacked stability, and sterility too. The fund was divided up, merged and restructured several times; no institution in the Russian Federation has been renamed so often. It pays out money under the supervision of the president and the government; calculated in dollars, the fund has seriously shrunk in recent years. There are similar funds in other oil-extracting countries, from the Arab Emirates to Venezuela.

As economists say, it all depends on the institutions, though, I would add, in radically different ways. In the countries with ‘bad institutions’ – in Russia, Iran, Venezuela, Nigeria, Libya – we see the vicious circle of resource dependency. Extracting raw materials and failing to sterilise their rents, these societies are devaluing their human capital. Undermining their institutions, they depend still more on their resources. Going from one crisis to another, such societies pollute the natural and the human environment. The result is demodernisation – the loss of previously attained levels of education and equality, a creeping paralysis of society, and arbitrary activity by the state. 34 With its resource wealth, uncertain property rights, political authoritarianism and record levels of inequality, Russia is the model of ‘bad institutions’. If the combination of resource dependency with good (or just about acceptable) institutions is called the Dutch disease, let’s agree to call resource dependency in combination with bad institutions the Russian disease.