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Norway's Sovereign Wealth Fund

Over on Slow Travel, the February Bloggers have been sharing ideas on possible blog posts for the month. I made a "request" of fellow blogger Sandra, and she indulged me with this post on how to get organized and get a regular exercise routine going. Her advice is great, so thanks Sandra!

In a comment to an earlier post of mine, Sandra mentioned she'd be interested in hearing about the Norwegian sovereign wealth fund. It is an interesting topic so I figured I'd give it a go!

Sovereign wealth funds are investment funds held by countries, usually countries that have little or no international debt, and who have "excess" income, often from petroleum or other natural resources. Injecting these kinds of income into the economy would lead to inflation, increased exchange rates, and Dutch Disease. As I mentioned in my post on the history of Norway, Norway found oil in the late 1960s and within a few decades had a large income from this, which, while a blessing, also needed to be managed in a sound way.

obj.phpi.jpeg
Norwegian bills

The sovereign wealth funds in Norway (there are two) are called the Government Pension Fund - Global, and the Government Pension Fund - Norway. The latter is the domestic fund (the smaller of the two) and it invests only in Norway. The global fund invests all over the world and was previously called the Petroleum Fund of Norway, because it is where the surplus wealth from the petroleum and gas production is deposited. (So while it is called a pension fund, it is not actually funded by people's pension contributions - instead it is meant to pay for pensions in the future.)

The fund is managed by a part of the Central Bank of Norway, and the money is invested in a wide variety of industries and companies across the globe. The value of the fund is estimated to reach 452 billion US dollars by the end of 2009. (I don't know if this projection takes into account the recession in the US and other countries.) It is the largest pension fund in Europe.

As you can imagine, there is a lot of political discussion around the fund - some people might prefer a check in the mail, like in Alaska! However, there is broad political unity behind the fund and mostly about the rule guiding the use of the money: "The rule states that a maximum of 4% of the fund's yield should be allocated to the yearly government budget." This means that only the interest of the fund can be used, not the capital. There is only one party that is against this rule.

The main discussion around the fund centers on these three points:
- How much to spend right now (as explained above.) There are a lot of letters to the newspapers that start with "How is it possible, in the world's richest country, that old people are suffering/schools are bad/streets are unsafe..." The more populist politicians want to insert more of the money into the economy but luckily they have not succeeded.
- Whether it is OK that so much of the fund (around 60%) is invested in the highly volatile stock market.
- Whether its investment policy is ethical: this debate led to new guidelines and to the exclusion of certain companies (arms production and environmental crimes are the two main reasons) from the fund. Interestingly, Wal-Mart is also excluded, citing human rights and labor rights violations. The US ambassador to Norway tried to get this changed but he was not successful.

This was today's lesson - I promise something more exciting for the next few days! (Norse mythology, more on the vikings...)

Comments (7)

Thanks Chiocciola! Interesting topic.And I've never heard of the Dutch Disease before, so thanks for linking that.

Kathy (Trekcapri):

Hi Chiocciola, very interesting read. Thanks for writing this great explaination. I know so little about Norway and I'm finding your posts really interesting. I have to come back to your blog later tonight to read the post you did on the history.

Thank you so much to Sandra for asking and to you for writing such an informative post. Have a great day!

Interesting post. I hadn't heard of Dutch Disease either.

Who is the woman on that top bill?

And I admire them for excluding Wal-Mart!

sandrac:

Chiocciola, thanks so much for this very interesting post! It seems Norway sets a very good example of how these funds should be managed (for the long-term benefit of the citizens of Norway!)

I agree with you, that the approach should be to save as much as possible and not allow politicans to use these funds as piggy banks. The whole idea is that these funds should finance pensions long after a country's non-renewable energy wealth has been depleted. (Alberta, where I'm from, has faced the same qustions with its Heritage Fund and not always done well.) Putting the SWF in the hands of the central bank to manage is a very good move!

I've been interested in the Norway fund's ethical investment approach -- WalMart is an excellent example. And last week, business pages were reporting the fund has dropped Canadian miner Barrick Gold Corp. because of environmental problems at a mine in Papua New Guinea.

Pretty money Interesting to read about how Norway manages their surplus. Perhaps Sarah should take a few tips. Can she see Norway from her house?

Girasoli, I am pretty sure she can't! Hihi. Yeah, this has made me curious about exactly how the Alaska oil wealth is managed.

Annie, the lady is Kirsten Flagstad, a famous opera singer (she did a lot of Wagner.)

Interesting! The hat she's wearing makes her look more like a scientist/explorer. Surprised she's an opera singer!

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