The Dutch Disease: Lessons from Norway

The Dutch disease Lessons from NorwayMethodologyThis research has exploratory and its empiric object is the Dutch Disease healing process by an opposite(prenominal) countries and by means of this information offer solutions for Nigeria. The methodology used is the case finishvass and development compendium of the st rovegies used by other countries for the neutralization of the Dutch Disease.The study consists in a research approach method which is characterized by describing the case of an event and its implications. There be several types of case studies, alone here is one exploratory case study in social club to create a better conceptual definition and understanding of the reanimate of Dutch Disease.A literature search was performed from a review, using inessential data analysis. Studies on secondary sources involve bibliographic books and research already done on the subject under study. We selected some expert writes on the subject related to this step. We chose to work with significant formers on the subject for bring forward study each of them.This analysis was organized into three chronological poles, as advocated by Bardin (2004) pre-analysis, material exploration and treatment of results, inference and interpretation. The first stage is characterized as the organizational phase and has three missions the choice of documents to be submitted to analysis, the facial expression of hypotheses and objectives and the development of indicators to substantiate the final interpretation. (Bardin, 2004 p.89).Finally, it was done the treatment and interpretation of the results obtained, in which the raw results are treated in order to be significant and valid. (Bardin, 2004, p.95). Thus found significant results that indicate how to glom the Dutch in Nigeria, as proposed for the work. Bardin (2004) points out, however, that the results obtained may cause a different outcome to the polish initially presented, serving as a basis for further anal ysis arranged around new-made theoretical dimensions, or practiced convey to different techniques. Finally, a conclusion is made about the Dutch Disease by the references of this work, assessing all the information collected and selected.NorwayNorway for decades was the poorest estate of the Scandinavian region. However, in the recent scotch history the country has been distinguished from the others presenting higher gross national product fruit compared to the rest of Europe and other developed countries such as United States, as presented in the graph on a lower floor. This turn of events is conventionally attributed to Norways vegetable crude discovery in 1969 and subsequent origination from 1971. In 2012, the crude welkin represented more than 23 per cent of the countrys total value creation. The revenues from the petroleum sector constitute 30 pct of the state revenues. Today Norway is the 7th largest exporter of oil and the 3rd largest producer of swash in the w orld. With per capita gross domestic product around $100,000, the Norwegian lifestyle has become such that the work week averages slight than 33 hours, one of the lowest in the world, and composition unemployment is low, there is large underemployment, made possible by advantages.GDP GrowthSource OECD (2015)However, it is insufficient in explaining the Norwegian economic harvest-home pointing to oil revenues as it was previously explained in detail about the nix coitionship surrounded by pick wealth and wealth caused by the economic illness of Dutch Disease. In fact, Norway assume managed successfully its oil wealth and avoided falling into trap of graphic detestation.Larsen (2004) explains the change in the speed of harvest-tide in the decade after starting the exploration of oil was invariable with symptoms of Dutch Disease, however, continued growing over the two subsequent decades. This is an examine of an escape from Resource Curse thus, Norway did non experienc e retardation from mid-70s to mid-90s. Mehlum, Moene and Torvik (2006) pointed to Norway and other few countries as the only ones that were able to counteract the election curse and the rent-seeking activities that are usually associated with it.Fosu (2012, pg. 45) argued that Norway escaped from Dutch Disease for several reasonsNorway has a history of natural resource management and integration with other industries with various linkagesThe institutions already were developed to handle shocks to the prudence such as large changes in terms of businesssThe revenues from oil extraction were gradually degage from expense these rents by establishing a buffer descent that helped to stabilize the economyAccording these rents from oil exportation became more significant, the buffer fund became large and a new fiscal policy was implemented in 2001This fund invested abroad and the returns are used to finance public expenditure with slight deadweight loss.In 1996 the Norwegian governi ng signed the Petroleum Act which constitutes the court-ordered basis for the regulation of petroleum sector. In principle, it stated the rent from oil and accelerator pedal belongs to the Norwegian people through their presidential term. Gylfason (2001) describes that as the Norwegian government has high interest in controlling the oil sector, has decided to deprive the oil and gas rent through valuatees and fees. The State awards a lilliputian fee to domestic and remote oil companies and receives roughly 40 per centum of all produced through direct partnership with licensees, taxationes and fees that corresponded to about 80 of the resource rent since 1980.Bresser-Pereira (2008) in its paper about a Ricardian approach of Dutch Disease describes that the severity of the natural curse varies according to the difference among the exchange rate equilibrium of the market rate and the industrial rate. The author points to the management of exchange rate through export tax on t he commodities as the principal means for neutralization of Dutch Disease. Furthermore, the author argues that the resources from tax created to neutralize the natural curse should non be invested in the country but in international fund therefore, the inflow of resources does not entail the revaluation of the local currency.Bresser-Pereira (2008) explains that Norway by imposing a tax on commodities adjusted the exchange rate equilibrium bringing it to the corresponding level of tradable sector exchange rate equilibrium thus, neutralizing the Dutch Disease. Moreover, the new adjusted exchange rate will be more undecomposed than the previous one thus, the country will have a geomorphological current account surplus.Gylfason (2001) also describes the oil revenues are deposited in the Norwegian Petroleum monetary fund allowed to invest only in foreign securities for the benefit of the current and future Norwegians generations. Only the real rate return of these assets is transfe rred to the annual State budget, according to the fiscal guideline, the government deficit cannot exceed 4 pct of the assets. This is also important to shield the domestic economy from mismanagement, counteract and overinvestment. Larsen (2004) defines this shield important because protects the economy from excessive motive and real perceptiveness when at full capacity, therefore, reduce loss of competitiveness. It is also beneficial when it is not at full capacity to allow some increases in core demand.Fosu (2012) described the two functions of this fund. The first is to secure that oil windfall is not consumed, but converted into financial wealth. The second is to separate these revenues from the domestic spending that would not vary according to the oil price fluctuation (fiscal policy). The thought is to have a stable spending of the oil revenues without interfere in the industry sector structure. Additionally, it helps to shield the non-oil economy from shocks in the oil sector, which can put insistence on the exchange rate.Brahmbhatt, Canuto, and Vostroknutova (2010) discuss solutions for solving the natural resource issue. They argue that fiscal policy is the most important instrument because can make the increase in wealth permanent as the same time as it can constrain the spending marrow to reduce volatility. Spending policies toward tradable sector (including imports) and frequent policies toward improving productivity of occult firms help to reduce the negative involves. Additionally, the government can encourage demand for imports to reduce demand pressure on the non-tradable sector while mitigates pressure on exchange rate appreciation and other adverse cause of natural resource windfall.In the case of Norway we can see in graph below the country has stimulated improvements in the manufacturing sector that has change magnitude its participation in the economy by 5% of GDP while the energy sector has fallen about 10 percent and non-tra dable sector remained stable. We can infer that has an effort from the government to push the manufacturing sector through investment in reading, business regulations, or reducing trade barriers and bureaucracy. Brahmbhatt et al. (2010) describes that these reforms have the aim of promoting foreign direct investment and create conditions for learning by doing.The exchange rate is impacted by the sizing of the non-oil budget deficit, or spending revenues as illustrated by Aamodt (2014). In short term oil and gas companies purchases NOK and the Norges Banks exchange transactions have set on the krone exchange rate. Conversely, in long term is the size of non-oil deficit that affects the Norways exchange rate. The revenues from oil do not have an impact by the fact that all government revenues from oil are accrued directly in foreign currency. But the government appreciates NOK when sells foreign currency to buy NOK in an amount equivalent to the budget deficit. In other words the br eakdown of the governments net property flow from oil sector into foreign exchange revenues resulting from oil and gas companies has no influence on the krone exchange rate.With the Petroleum Fund the government isolates the proceedings of oil shocks and the oil price fluctuations on Norwegian economy because the entry of money into the economy is controlled and planned according to the penury of the country. The State can make long term plan regarded to its domestic spending and accordingly maintain the krone exchange rate and pompousness stable even when the oil demand decreases.Other factors were important to neutralize the resource curse in Norway as stated by Gylfason (2001). The author explains that Norway has a centralized wage formation system to limit oecumenic wage increases at the magnitude of productivity increases in manufacturing sector. This is possible because the trade unions are large coalitions of employers and employees that are able to consider aggregate i nterests sooner of special ones. Additionally, both parts use a neutral authority to compute productivity increases in the manufacturing sector, institutionalize this information as ceilings of general wage increases. Therefore the countrys centralized wage dialogue system contributes to prevent fast appreciation of salaries in different sectors.Larsen (2004) argues that income coordination is important as the public sector limited wage increases to the productivity maturement in the internationally competing industrial sector. In other words, this income coordination neutralized the impact of externality in the manufacturing sector avoiding high inequalities between tradable sector and resource sector. This is an important factor for the neutralization of Dutch Disease as reduces the beat back shift between the two sectors. The graph below shows the wage development in Norway since 2002 in which we can see that gap between oil sector and the others never exceeded 2 per cent i n this period.Institutional grapheme is considered by Mehlum et al. (2006) as an important element to reduce the effects of Dutch Disease as natural resource abundance stimulates the shift from yield rent-seeking to the activities related to resource extraction. The authors associate the lack of natural curse with the founding of efficient, bureaucratic and transparent government. They presented a model in which shows the negative effect of resource abundance on growth vanishes in countries with high institutional quality like Norway.The quality of institutions is also related to the corruption detection index as a measure of rent-seeking. Gylfason (2001) found a relation between natural resources wealth and increase in corruption and consequently decrease the per capita growth. In Norways case, the author showed that since oil was discovered, the corruption has declined and countrys GDP growth was stable during the last three decades. The graphs below shows Norway keeps a high l evel of freedom of corruption placed between 10 less corrupted countries of the world while economic growth spurted since the oil descovery, especially after 2000.Finally, the public expenditure on education in Norway did not decrease after oil descovery. According to OECD, Norway has an unthinkable 100% literacy rate and is third country which invests more in education, what proves the government decisions are not oriented to favor natural resource extraction instead of other tradable goods production. Gylfason (2000, p. 4) in its studies about the correlation between natural resources, education and economic development showed that countries with natural resources wealth invest less in education and consequently has a poor economic performance. Nevertheless, the author mentions that Norway is one of the few exceptions The Norwegians show no signs of neglecting education, on the contrary, as the symmetry of each cohort attending colleges and universities in Norway rose from 26 pe rcent in 1980 to 62% in 1997.