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Über dieses Buch

This book elaborates on how Norway has managed to convert a large fraction of its endowment of hydrocarbons below the seabed of Norwegian waters into financial wealth, invested in the world’s capital markets. Further, it explains how this wealth is managed. Under the current guidelines, only the assessed return on investment may be allotted to public budgets. This ensures that the wealth will benefit both current and future generations. The capital is gathered in the Sovereign Wealth Fund – or State Pension Fund Global (SPF-G) –, which is intended to maximize capital value without exceeding acceptable risks. The book offers new insights into the history and management of the fund, examines its successes,and discusses future challenges. Given its scope, it appeals to scholars of economics, finance and political science, and to anyone interested in the sustainable investment of natural resource-based revenues.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract
This chapter presents the topic: How a small state like Norway is able to capitalize on its rich sub-sea endowment of hydrocarbons, to develop and bring the resources to market, and then save a fraction of the proceeds as investments in world capital markets. This experience has been cited as successful. The author shows how this came about in a thorough discussion of the case, emphasizing institutions. The working and implications of Norway’s large SWF is important. The Fund in operation since 1998 is, however, preceded by a chain of events since the first major oil find in 1969. Important serially dependent steps including earn, save, and invest were completed. The emphasis has been on financial sustainability, and increasingly on profitability and ethics.
Ole Bjørn Røste

Chapter 2. Natural Resource Sustainability

Abstract
Deposits of hydrocarbons are a specific type of non-renewable natural resources. Once developed and sold, they are gone. They can be left alone for prospective future development or extracted and converted into financial assets. The more easily extractable parts are developed early. Over time, technological development increases the volume of that category. Oil resource are ‘free’, and extraction highly profitable. An oil industry may thus attract significant resources. Positive income shocks evolve in good times, with needs to save for the future. In Norway, the state has mended individual savings failure through removing income from current budgets and investing it systematically long-term. Throughout the oil age there has been significant savings and investment, till 1998 in domestic infrastructure through public budgets, and later internationally through a large SWF. With erratic hydrocarbon prices, it was risk-reducing not to leave more hydrocarbons untouched. This is underscored both by high investment returns and recent indications of fossil fuel non-sustainability.
Ole Bjørn Røste

Chapter 3. The Economics and Politics of SWFs

Abstract
This chapter discusses some important aspects of constrained public spending. This is difficult for individuals and states alike, and required for savings and later investment in a SWF. It also discusses how returns from the fund are spent, and implications of this. A fiscal rules’ literature prescribes that regulations should be transparent and credible, to isolate resource income from the general budget, and clearly specify allowed spending. Norway conforms to this. Resource income accrues to the Fund before it is spent, and up to 3 pct. of the balance prior the budget year can be spent annually. The metric is the structural oil-adjusted deficit; i.e. without resource incomes in a cyclically neutral year, and the rule is not used mechanically. Funds are spent to provide households with goods and services or tax relief. As illustrated by Alaska, one could instead pay a fraction of the returns to the beneficiaries. Provision may, however, be less contentious and thus less politically risky than handouts.
Ole Bjørn Røste

Chapter 4. Investment in Practice

Abstract
This chapter discusses practical aspects of how off-shore investments are made regarding the locations of assets, organization of investment activities, allocation on asset classes, and selections within them. This clarifies key elements of an index-like management style. The investment horizon has implications for asset allocation. In aggressive approaches, one accepts risk to aim at high expected returns. One measure of the risk appetite is the allocation to equity. Further, locations of assets matter. Not all locations receive external investments. An investor must at a minimum be able to expect to receive the fruits of his investment if it is successful. Secure environments are thus preferred. There are scale economies in fund management, linked e.g. to overhead costs. This favors large funds. Large players may, however, move market prices through their transactions. This makes it more difficult to execute transactions for large than for small players, and hamper activities that require large transaction volumes.
Ole Bjørn Røste

Chapter 5. The Ethics of Investment

Abstract
Investment like other socially important undertakings has an important ethical dimension. The wealth transfer to future generations discussed in earlier chapters is a highly important example. This chapter, however, discusses how it is important for investors to act consciously in relation to the diverse ethical aspects of the activities they finance. Government-owned SWFs must satisfy their political constituencies. A piece of good news is that Norwegians like measures that support important international governance norms. The Fund does, e.g., stay away from the production of tobacco and some types of arms, as well as poor labor standards and child labor. Activities implying high risks of environmental degradation, and serious crime including corruption, are also avoided. Restrictive measures on numerous items can be extensive when combined. This reflects that norms related to Socially Responsible Investment (SRI) have gained significance in investment, including  for the GPF-G.
Ole Bjørn Røste

Chapter 6. Risks and Uncertainty

Abstract
This chapter discusses the unknown future. With uncertainty, something good or bad may happen. In investment, one is often concerned with the likelihood of the latter. Then there are complicating unknown unknowns. The investments return known only ex post sums it up as for a roulette ball that has reached standstill. Economic slumps represent risk. Everyone may have been too optimistic regarding the future. Asset prices could fall sharply, particularly for stocks and fixed real assets. For SWFs, slumps may be the most important risk. Another important factor is political stability. The world became safer for investment around 1990. Still, geopolitics represents a risk that has excluded some areas from receiving investments. However, for most investors more mundane, traditional risks dominate. A further uncertainty is demographics. Resource wealth is diluted by immigration. Traditional Norwegians have few children, late in life. Newcomers have higher birth rates and are not integrated in the labor market. Higher immigrant employment rates and more successful integration seems needed for long-term success and sustainability.
Ole Bjørn Røste

Chapter 7. A Sketch of an Evaluation

Abstract
To evaluate is to judge outcomes, often within a policy framework. This chapter is on what Norway has to show for her windfall resource gains, which is at least the GPF-G. How well has one done under the circumstances? Windfall gains from oil set in train mechanisms that countries differ in their ability to address. Norway had developed good institutions before the oil was discovered. Social democrats with frugal spending attitudes ruled for decades based on majorities in Parliament. The 1970s saw infrastructure investments, partly financed by debt. The SWF signaled a net asset position from the 1990s: When debts were paid off, both oil production and prices soared. An opportunity to invest heavily was seized by the government. There are no signs of low growth due to resource curse. However, fiscal populism is present, and spending habits have changed. The wealth may have changed Norwegians. Many things could still go wrong. Perhaps most fundamentally, government spending could take off.
Ole Bjørn Røste

Chapter 8. The Future of the GPF-G

Abstract
The resource deposits in the Norwegian seas became a national treasure with developments in law of the seas that made the coastal states resource owners. With the help of foreign oil companies and hard bargaining public officials, it became possible to explore and extract resources from underneath the seabed, including in deep waters. This marked a contrast to development of oil deposits on land elsewhere. After a long while significant funds were saved and invested in international capital markets. In this process, a number of serially dependent milestones were reached, to earn, save and invest. Technically, Norway may be set for the long term with a fund some three times the size of her mainland GDP, of which only the real return is spent recurrently. The rest of this journey, however, will run across uncharted territory. One is not aware of long-lasting, publicly owned financial fortunes in the Western world to date.
Ole Bjørn Røste

Backmatter

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