Negotiating Dilemmas of the Norwegian Sovereign Wealth Fund PDF

10 Negotiating Dilemmas of the Norwegian Sovereign Wealth Fund Adapting an Economic Power House Resource-riches are not necessarily a blessing.¹ States exposed to large revenue streams tied to resource extraction often experience various forms of the so-called ‘resource curse’: with less economic an...

10 Negotiating Dilemmas of the Norwegian Sovereign Wealth Fund Adapting an Economic Power House Resource-riches are not necessarily a blessing.¹ States exposed to large revenue streams tied to resource extraction often experience various forms of the so-called ‘resource curse’: with less economic and social development, struggles with corruption, and destructive conflicts over the distribution of rents (Sachs and Warner 1995). A less dramatic but troublesome enough outcome are struggles with inflation, structural change towards sheltered sectors and loss of competitiveness, referred to as the ‘Dutch Disease’ in the literature (Cordon and Neary 1982). Oiland gas-rich Norway has avoided these pitfalls and stands out from its peers in terms of her performance on indicators such as growth, employment, inflation and universal welfare provision (Holden 2013). In this chapter we argue that a key reason for this lies in its successful handling of petroleum-related revenues through an elaborate institutional structure that facilitates compromise. This allowed the authorities to prudently navigate the dilemmas of the saving versus spending tradeoff and the thorny issue of ethical investment versus conventional economic ideas of how to maximize returns. The fund was established in 1990 after the unanimous parliamentary passage of the Government Petroleum Fund Act. Today, the Norwegian Government Pension Fund Global (popularly known as the ‘oil fund’) is the largest sovereign wealth fund in the world at a total 2021 value of 1.3 trillion U$ (see Figure 10.1). The fund is crucial for funding the comprehensive Norwegian welfare state and is large enough to secure fiscal leeway in times of crisis such as after the 2008 meltdown of global finance and Covid-19 pandemic. In 2019, transfers from the fund accounted for 18 per cent of government spending, growing to 26 per cent after the onset of Covid-19 related spending. The first deposit into the fund was made in 1996 and when the fund started to grow, public debate around its goals and investment strategies emerged. This ¹ Our depiction of the history of the fund is to a large degree based on Øvald et al. 2019. Camilla Bakken Øvald and Bent Sofus Tranøy, Negotiating Dilemmas of the Norwegian Sovereign Wealth Fund. In: Successful Public Policy in the Nordic Countries. Edited by Caroline de la Porte et al., Oxford University Press. © Camilla Bakken Øvald and Bent Sofus Tranøy (2022). DOI: 10.1093/oso/9780192856296.003.0010 Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 Camilla Bakken Øvald and Bent Sofus Tranøy CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 197 13,000 12,000 12,000 11,000 11,000 10,000 10,000 9,000 9,000 8,000 8,000 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 –1,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Krone rate Return –1,000 Inflows (after management costs) Total Fig. 10.1 The market value of the Government Pension Fund Global, 1998–2021 Source: Norges Bank. www.nbim.no. Consulted 15 August 2021. forced policy elites to make adjustments with a view to securing and maintaining the fund’s legitimacy and public support. Pressure on the fledgling fund became especially notable when opposition parties from both sides of the political spectrum began to argue for increased public spending. In addition, ethical and environmental concerns gained increasing public support. The spending versus saving issue was settled in a policy package enacted in 2001 (Lie 2001). This package included a fiscal rule which stated that transfers from the fund to the central government budget should, over time, follow the expected real return on the fund. This enables countercyclical spending in downturns, while at the same time acting as a break on short-term public spending from the fund’s resources. The package also included a central bank reform that de facto changed the macro-economic regime within which economic policy decisions are made. The second dilemma concerned how to invest. Questions regarding ethical and environmental concerns were raised early on, including in what asset classes and according to which rules the investment strategy should be based, balancing risk, returns and ethics. The issue was eventually addressed in 2004 with the establishment of ethical guidelines. In this chapter we home in on the decisions of 2001 and 2004 respectively. Both represented conceptual and institutional innovations that made compromise possible where there previously had been opposing factions unable to find common ground. We will argue that the spending vs saving and the investment dilemmas both found stable solutions because new conceptual and institutional spaces were opened at two critical junctures. Combined, the decisions of 2001 and 2004 have secured the fund status as a valued public institution (cf. Boin et al. 2021) and have contributed to the success of the wider economic regime of which it is a key pillar. In this chapter, we tell the story of how this became possible (see Figure 10.2). Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 13,000 198 NORWEGIAN SOVEREIGN WE ALTH FUND 1962 Phillips Petroleum applies to the Norwegian authorities requesting permission for activities in the North Sea 1960 1990 Norway’s Parliament passes a law to establish the Government Pertroleum Fund. 1969 The first discovery of oil in the field called Ekofisk. It is the largest oil field ever found at sea. 1965 1975 1980 1985 1990 1995 1983 1996 The first proposal of the creation of a fund where the government can store the current temporary rush of oil revenue, by an official Norwegian report (NOU 1983:27). The fund gets its first capital transfer from the Ministry of Finance. 2004 Ethical guidelines for the management of the Government Pension Fund Global. 2000 2001 A fiscal rule specifying the spending of the oil revenues is agreed upon. The transfers from the Fund to the central government budget shall, over time, follow the expected real return on the Fund, which is estimated at 4 per cent. Fig. 10.2 Timeline and critical junctures in the history of the oil fund Source: authors. Dodging the Resource Curse In 1962, the US oil company Phillips Petroleum applied for permission to explore the seabed beneath the territorial waters of Norway. Norwegian authorities were caught unawares by this sudden interest in their continental shelf. Norway did, however, have a history of successfully managing natural resources at the intersection of national interests and foreign capital and know-how. The Industrial Licence Act from the early twentieth century determined that hydroelectric power ultimately belonged to the state, and the dominant ideology was that revenue from natural resources should benefit the population at large (Hanisch and Nerheim 1997; Mehlum et al. 2006). The political ambition to establish public ownership and control of this newly discovered natural resource was made all the more challenging by the fact that Norway possessed neither the capital nor the knowledge or technology to exploit potential oil discoveries. Norwegian authorities needed to design a regime capable of providing economic incentives for international oil companies to invest in developing the requisite, highly expensive deep-sea technology while at the same time safeguarding the nation’s industrial and socio-economic interests. This balancing act was addressed by means of a national petroleum policy approved in parliament in 1971, listing 10 basic principles. These included national control, the development of a national oil industry, a general rule of bringing all petroleum ashore onto Norwegian soil, and the establishment of a state oil company (Recommendation to the Storting no. 294 (1970–1971)). The tax system for the petroleum sector is based on the notion that the petroleum sector yields extraordinary revenue (i.e. the oil rent). The system has Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 1963 The Norwegian Government proclaimed sovereignty over the Norwegian continental shelf. 1970 1998 Norges Bank Investment Management is set up to manage the fund on behalf of the Ministry of Finance and converts about 40 per cent of the fund’s bond portfolio into equities. CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 199 Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 evolved since the 1970s, but the main idea continues to be the same: to retain incentives for the companies to invest in and produce oil, include the participation of Norwegian industry in the process, and ensure that the government receives a sizeable portion of the revenue (Lie and Venneslan 2010). At present, the oil companies have a special tax rate of 53 per cent, making the total level of taxation on profits from oil 78 per cent. A successful use of natural resources involves multiple stages: The upstream issue of attracting investment and securing resource income and the subsequent economics and politics of managing both revenue from natural resources and the general impact on the structure of the economy (Venables 2016). In other words, the main challenges are not restricted to getting oil production under way. The question of how to integrate rent-based revenue into a pre-existing domestic politico-economic order with governance, production and distributional institutions and practices is of equal importance. The main pillars of this order in Norway were parliamentary democracy, a strong economist-dominated technocracy, a state-dominated but mostly privately-owned export sector based largely on hydroelectric power, corporatist labour-market institutions geared towards defending the competitiveness of the export sector, and a generous, universalistic welfare state. The combination of corporatist labour-market institutions and a universalistic welfare state is the core of what has been touted as the ‘Nordic model’—a mode of organizing the economy and society that has won international recognition for its ability to socialize risk and deliver economic efficiency and comparatively egalitarian outcomes in a virtuous circle, crucially enabled by high levels of both intra-personal trust and trust in governing institutions (Rothstein and Stolle 2003). The economic challenges of large yet temporally finite revenues from petroleum resources were recognized from the very beginning. The idea of investing petroleum revenues abroad was first mentioned in a White Paper in 1974 (Report to the Storting no. 25 (1973–1974)). The ambition was to analyse the dramatic potential consequences of exploiting the significant petroleum-based fortune on the Norwegian economy and society. The original line of argument was that the people of Norway should not only spend oil wealth on material goods, but that the state should also use its newfound riches to help build ‘a qualitatively better society’. The White Paper foreshadowed themes that would later gain currency in other circles, such as environmental concerns, encouraging more time for people to take care of each other, and other topics traditionally considered ‘too soft’ for a finance ministry to espouse. The second line of argument concerned how to prudently introduce the proceeds of oil sales into the domestic economy. Put differently, it was about how to build ‘a qualitatively better society’ without incurring unacceptable costs in the form of an excessive and too rapid rate of (structural) change. The idea of a petroleum fund was mentioned in the White Paper, but not debated in the Storting. It was picked up again in a report from a government 200 NORWEGIAN SOVEREIGN WE ALTH FUND The Design and Choice of the Fund The overall challenge and objective were easily agreed upon, namely to integrate petroleum revenues in a sustainable manner. The arguments were both structural and cyclical: to maintain a viable export sector independent of the petroleum sector and not to allow the national budgets to become too dependent on volatile oil prices. The choice of policy instruments was more complicated. When the idea of a petroleum fund gained traction in the late 1980s, the Ministry of Finance opposed it ferociously. They feared that a petroleum fund might lead to increased domestic spending outside the disciplining boundaries of the national budget (Lie and Venneslan 2010). In the late 1980s, echoing both a banking crisis and falling oil prices, the Norwegian economy experienced its worst crisis since World War II. The budget deficit was substantial and the thought of future oil revenues well exceeding what was badly needed to balance the budget seemed less relevant. During the 1980s, a fault line appeared between advocates of an ambitious industrial policy and those who prioritized fiscal responsibility. It pitted officials from the Ministry of Finance against their counterparts at the Ministry of Industry, who wanted to utilize a prospective fund to finance major industrial projects (Lie and Venneslan 2010). There was support for the expansionist position among politicians from both the Labour Party and the Conservative Party, who voiced ideas on the manner in which the fund could aid large national infrastructure projects and the internationalization of Norwegian industry. However, by the time the proposition to set up the fund came up, the Ministry of Finance had assumed full control of the main principles for its establishment. All government net revenues from the petroleum sector were to be transferred to the fund, and any withdrawals from the fund would be integrated in the ordinary government budget. Consequently, the ministry ensured that the money from the fund could not be used to finance agendas that were not prioritized in Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 commission in 1983 (Norwegian Official Report 1983: 27). The report discussed the possibility of a buffer fund to avoid the negative effects of high volatility in oil prices. The report presented plans that presaged many specifics of the current fund-based regime, but at the time concluded the notion of a fund was not a realistic option. As the 1980s progressed, investments and their corollary (oil and gas extraction income) grew at such a phenomenal rate that the idea of establishing a fund gained currency, at least metaphorically. By 1989, both the Conservative Party and the Labour Party supported the idea in their respective government long-term programmes (Report to the Storting 83 (1984–1985) and Report to the Storting 4 (1988–1989)). When the Conservative Party won the 1989 election, establishing a fund became part of the new government’s policy platform (Lysebuerklæringen, 4 October 1989). CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 201 ² S. Gjedrem, personal communication, 27 February 2017. ³ T. Eriksen, personal communication, 28 February 2017. ⁴ J. Stoltenberg, personal communication, 6 October 2017. Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 the regular budget. Finally, the Government Petroleum Act made it clear that the wealth could only be invested abroad. According to the Director General of the Ministry of Finance, Svein Gjedrem, the message to the other ministries was clear: ‘This reform will be handled by the Ministry of Finance. Special interests can keep their hands off ’.² The Ministry of Finance was defined as the fund’s formal manager, but the intention was to invest any future revenue in bonds like the other currency reserves held in Norges Bank. The choice of the central bank as manager of the fund provided an intentional arm’s length distance from the owner and, combined with strict guidelines, out of the reach of powerful interest groups. It was also presumed that the central bank would possess the combination of experience, technical skills and role appreciation necessary for managing a state-owned fund, says Tore Eriksen, one of the central bureaucrats in the Ministry of Finance: ‘We believed that Norges Bank had the necessary understanding of the social responsibility a state-owned fund has to assume.’³ Throughout the early 1990s, the fund remained a purely theoretical construct that had no money in its account. The Norwegian economy experienced a deep downturn at the time, and the prospects of large petroleum revenues and a budget surplus seemed remote. However, the economy improved rapidly in the midnineties, and in May 1996 the Ministry of Finance was able to make its first deposit in the fund’s account in Norges Bank. The following year predictions of future growth in revenues rose rapidly. So did actual revenues, and the size of the fund reached the NOK 100 billion threshold as early as 1997. Since revenues were higher than anticipated, the Ministry of Finance felt compelled to start thinking more seriously about long-term returns. Investing in bonds was a safe strategy with minimal risk, but expected returns were low. Introducing and settling for an equity-share was seen to represent a trade-off between risk and expected returns. The Minister of Finance at the time, future prime minister Jens Stoltenberg, readily agreed that the fund’s then strategy did not get the balance right. He was convinced that the strategy should include stock market investments, and persuaded the government, the parliamentary group and the Parliament’s Standing Committee on Finance and Economic Affairs of this.⁴ The new investment strategy was presented in May 1997 (Report to the Storting 2 (1995–1996)). Norges Bank was given the managerial responsibility, but the mandate came with strict guidelines from the Ministry of Finance. The strategy was to manage the fund in a risk-controlled manner, investing 40 per cent of the fund’s assets in equity, with a benchmark set by the ministry. The benchmark index is based on broad, global indices, which largely reflect the investment 202 NORWEGIAN SOVEREIGN WE ALTH FUND opportunities of global financial markets. The fund is managed to closely track the return on the benchmark index, limiting the choices made by the managers. From Policy Dilemmas to Institutional Innovations Saving vs spending On 17 March 2000, Jens Stoltenberg took office as Prime Minister. His cabinet ran into serious headwinds almost immediately on the issue of the burgeoning petroleum fund. Circumstances conspired against Stoltenberg: oil prices rose steadily through 1999 and 2000, and at the same time the volume of Norwegian oil production peaked. The fund thus grew at a breakneck pace. The visibility of a such fortune in public savings changed the terms of the political debate in Norway, fuelling the pressure to increase spending. The state had a burgeoning kitty, yet refused to touch it. The right-wing populist Progress Party saw an opportunity in this situation. There were urgent needs, and plenty of petroleum revenue, why was the government so reluctant? Every time stories of a seriously sick child waiting for treatment, or state-of-the-art potentially life-saving medical equipment was lacking in a Norwegian hospital and made the news, the Progress Party was on the case. When demanding increased spending on any given objective, the Progress Party made a habit of starting sentences with the phrase: ‘In (one of ) the richest countries in the world, it is a scandal that we cannot even afford …’. This message was picked up by large sections of the electorate. The Progress Party soared in the polls, while the Labour Party suffered (Tranøy 2010). The Ministry of Finance feared that without clear guidelines, spending would get out of control, thus it started working on a plan for a gradual phasing in of oil money into the national budget. If a ‘safety valve’ was not installed, the whole ‘dam’ was at risk of breach. It was the stuff of nightmares for every finance official socialized into the virtues of fiscal prudence. Something had to be done. Plans for new guidelines were prepared in great secrecy. Only a handful of bureaucrats in the economics section of the Ministry of Finance were involved, along with Stoltenberg, the Minister of Finance, and two state secretaries. Several models for Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 The mandate of the fund is to safeguard Norwegian financial wealth for future generations in a secure, efficient, responsible and transparent way, within the constraints laid down by the Ministry of Finance. In the early years all other concerns were met with fierce rejections. The ethical issues addressed by NGOs and some political parties were ignored. On the other hand, the growing clamour to spend more money was less easily ignored. CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 203 ⁵ J. Stoltenberg, personal communication, 6 October 2017. Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 forecasting the oil revenue and calculating the rate at which it should be phased into the economy were discussed. A considerable amount of time was spent on how to frame and communicate the new fiscal rule in a manner that ordinary voters could grasp. Stoltenberg was aware that he had to act as ‘the salesman’ for the new macroeconomic regime: ‘My task was when we had concluded … to go out and get political approval in the party, the parliamentary group, the Norwegian Confederation of Trade Unions (LO) and from the public at large’.⁵ The high level of secrecy limited the inclusion of opposition parties and interest groups in this process. However, Stoltenberg chose to consult with LO, who had raised concerns that increasing spending would hurt the industrial sector. LO has historically maintained close ties with the Labour Party and consulting with LO was the appropriate thing to do for a Labour government about to embark on a major political reform. The plans were presented in a White Paper published on 29 March 2001 (Report to the Storting 29 (2000–2001)). The new fiscal rule’s assertion that the annual non-oil deficit should, on average over the economic cycle, be limited to 4 per cent of the fund, was approved by a large parliamentary majority. At the time, 4 per cent was presumed to be the long-term real rate of return from the fund. The target came with some discretionary room for manoeuvre, though in a symmetrical fashion so that spending could be above 4 per cent in a downturn and below at times of strong demand and a positive output-gap. The 4 per cent rule—later changed to 3 as the fund grew—should not be understood as a hard target, but rather as a focal point upon which actor expectations could converge. At the same time, Norges Bank was released from its formal exchange rate target and introduced a symmetrical inflation target of 2.5 per cent in its place. The argument was that this would maximize currency stability, or at least maintain as orderly a relationship as possible with the Euro, Norway’s most important trading partners’ currency. The analysis was that Norway needed an inflation target slightly above that of the European Central Bank to ‘create room’ for the now planned-for phasing-in of petroleum-related revenues. As we shall discuss later in this section, this manoeuvre came too late to help Stoltenberg in the elections in the fall of 2001, but it did strengthen the fund’s legitimacy over time. In the electoral survey of 2001, 56 per cent of respondents answered that they wanted increased petroleum revenue spending, while 35 per cent supported present spending levels. By 2009, the tables had turned: 53 per cent were satisfied with spending levels, while only 33 per cent wanted higher spending levels (see Figure 10.3). Thus, the fiscal rule was an important adjustment to secure the fund’s political legitimacy and achieve buy-in, from the Progressive Party in particular. In 2013, Siv Jensen from the Progressive Party became Minister of Finance, and during the preceding election campaign the Progressive Party 204 NORWEGIAN SOVEREIGN WE ALTH FUND 80 67 70 56 56 60 53 53 50 40 35 34 30 23 0 10 9 1997 2001 Restrictive 10 2005 Both/Don’t know 11 11 2003 2009 Spend more oil money Fig. 10.3 Norwegian voters’ attitudes towards the usage of ‘oil money’ (1997–2013) (in per cent) Source: Election Survey, 2013. Data collected by Statistics Norway. First NSD edition, Bergen 2015. had already moderated its resistance against the fiscal rule. As Minister of Finance, Jensen upheld it. Like her predecessors, she has continued to praise the fund and its achievements both in international and national media. Slowly but surely, the fund and its basic governance principles were institutionalized and the spending versus saving trade-off found a stable solution. Maximizing returns vs responsible investment Yet there was another line of contention: the debate about engaging in ethical and socially responsible investing. The idea of the Norwegian state ‘speculating with’ state revenue in the international stock markets was an unfamiliar concept for Norwegian politicians and several NGOs raised ethical concerns. In the fall of 1997, when a new government led by the Christian Democrat Kjell Magne Bondevik replaced the Labour government of Thorbjørn Jagland, it announced that it wanted ethical and environmental considerations to be integrated into the investment strategy. Bondevik’s minority government was supported by a heterogeneous group of politicians, NGOs, and journalists who repeatedly raised the issue, suggesting different solutions to how ethical and environmental concerns could be included in the strategy. The government had the political intention of changing the investment strategy, but lacked the political power to do so. Nor did it have concrete proposals about the nature of the changes that were to be made.⁶ Meanwhile, Norges Bank cautioned that negative screening would be both challenging and costly (Norges Bank 1998). Restrictions were likely to increase administrative ⁶ K.M. Bondevik, personal communication, 5 March 2020. Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 20 10 36 33 CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 205 Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 costs and, since the anticipated risk would be higher, ‘the result could be a lower net return for a given level of risk’, Norges Bank argued. Following this advice from Norges Bank, the government’s intentions to implement ethical guidelines were shelved, allegedly for practical reasons (Report to the Storting no 2 (1997–1998)). Meanwhile, the issue started to be reframed, gaining salience in the process. Two different developments help account for this. One was set in motion by recurrent media coverage of the fund’s investment in companies engaged in politically unattractive or even illegal business, such as the production of landmines or child labour. It repeatedly provided unpleasant media exposure for any Minister of Finance. This helped the Bondevik government warm to the idea of exploring ways in which to avoid such embarrassments. A diverse group of civil society actors and a dedicated journalist working in parallel but not necessarily in tandem with a couple of parliamentarians from the Socialist Left Party, repeatedly managed to bring ethical problems to the attention of the general public. The other development concerned changes in the political arena, as a surprising political coalition between two parties from opposite sides of the political spectrum emerged. In 1997 the Norwegian Nobel Committee awarded the Nobel Peace Prize to the International Campaign to Ban Landmines (ICBL) and its founder, Jody Williams. Norwegian authorities and NGOs had been active in the campaign, in turn raising concerns that the fund might be invested in companies manufacturing landmines. Norway had signed the international convention to ban landmines and now stood accused of hypocrisy and violating its international obligations. The government held out against the idea of general ethical guidelines, but in 2001 it created an exclusion mechanism for the fund. The Ministry of Finance gained the power to ban certain investments from the fund if they violated Norway’s obligations under international law, as defined by the petroleum fund Advisory Commission on International Law. Given that anti-personnel mines were the single focus of the proposal, Norges Bank set aside its concerns about diversification limitations (Norges Bank 2020). The exclusion mechanism had a restricted scope but strengthened the narrative of ethical challenges and the sense of having to ‘do something’ within the Ministry of Finance. At the same time, significant events were taking place in the political arena. Prime Minister Jens Stoltenberg, himself an economist and a staunch defender of the ‘do not politicize the fund’ position, suffered a defeat of historical proportions in the elections in the fall of 2001, with a major leakage to the left. This arguably made him more open to new ideas with the potential to appeal to the left wing of his catch-all party. In the winter of 2002 several local branches of the Labour Party argued in favour of ethical considerations and came out in support of Norway’s largest labour union, LO, which was emphasizing ‘ethical responsibility’ in the fund’s investments. Several reports financed by NGOs showed practical examples of ethics in finance (Bay 2002; Tørres 2002), and the rise in media attention was pushing 206 NORWEGIAN SOVEREIGN WE ALTH FUND ⁷ Ø. Djupedal, personal communication 8 February 2018. ⁸ H.P. Graver, personal communication, 2 Janary 2020. Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 parliamentarians to comment on the matter (Ergo 2002). In May 2002, the rightwing Progress Party surprisingly aligned with the Socialist Left Party on the matter and suggested appointing an expert group with a mandate to propose ethical guidelines.⁷ The Labour Party, now in opposition to a minority right-wing government coalition headed by the Christian Democrats, decided to support the proposition. At first the parliamentarians from the parties in government rejected the proposal, but upon realizing that they were facing a possible defeat in parliament, they changed their position a few days before the actual vote (21 June 2002). In October 2002, a commission headed by law professor Hans Peter Graver was formed and mandated to suggest how to integrate ethical concerns into the fund’s operation. A creative process of institutional innovation ensued, and two years later the commission delivered a proposal which in effect amounted to a turnkey ethical guidelines institutional structure.⁸ The last-minute consensus achieved two years earlier had stuck and the commission’s recommendations were adopted by a unanimous parliament (16 June 2004). The Ministry of Finance issued new ethical guidelines in the fall of 2004. It established an independent Council on Ethics with a mandate to evaluate whether or not the fund’s investment in specified companies was in compliance with its ethical guidelines. The Council makes thorough assessments of individual cases, inviting to its hearings representatives from companies under review and placing strict demands on evidence before allowing itself to recommend divestment. The Council on Ethics advises Norges Bank, which decides on the exclusion of companies or to place companies on an observation list. The ethical guidelines include two negative mechanisms: one is negative screening to prevent inclusion in the investment universe of companies that themselves, or through entities under their control, manufacture weapons whose normal use violates fundamental humanitarian principles. The other is a facility for divestment from companies where owners systematically breach ethical norms: such as (a) gross or systematic violation of human rights, (b) gross violations of individual rights in war or conflict situations, (c) severe environmental degradation, and (d) gross corruption. The fund’s emphasis on responsible investments coincides with a trend in international fund management: the idea that sound financial investment is an ethical obligation on a par with principles of socially responsible investment (SRI). One argument is that the present generation has an obligation to future generations to maintain and increase the wealth they will inherit, and that unethical investments are at cross purposes with this goal. The ethical and social strategy of the fund has been reviewed several times. In 2008, the government launched an evaluation of the ethical guidelines, inviting CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 207 NGOs and other stakeholders to give their recommendations. Finance Minister at the time, Kristin Halvorsen, said: As a result, a programme of positive selection directed towards green investments began in 2010. Thus, the ethical and social strategies have been important for increasing public deliberation around the fund and gaining legitimacy among NGOs and civil society. There are several examples of NGO-lobbying campaigns that have resulted in changes in the fund’s portfolio, for example the decision to divest from coal companies in 2015. A Policy Success? In our assessment the fund can be considered a policy success on three of the four dimensions specified in the PPPE theoretical framework: it’s only along the processual dimension that our assessment is less than celebratory. Assessed in terms of endurance, the popularity and loyalty which the fund enjoys today would not have emerged as smoothly as it did, were it not for the two compromises analysed in this chapter. When the hurdles represented by the spending versus saving and returns versus ethics dilemmas were overcome, the path was clear for the fund to grow into a cherished and taken-for-granted Norwegian institution. The fiscal rule has worked as a focal point, upon which actor expectations can converge, rather than a hard-edged rule. It has been critical to Norway’s ability to strike an enduring balance between (popular clamour for more) spending on the one hand and the need to save and protect the non-petroleum sector on the other (Tranøy 2010). The 2004 enactment of ethical guidelines similarly relieved the Norwegian political system of a potentially debilitating tension between returns and ethical considerations, between those who fear any interference with ‘pure’ financial logic on the one hand and those who see modern corporate capitalism as ridden with misdeeds and immoral acts on the other. The guidelines are not set in stone, and both they and the institutional structure they are baked into have been subject to reform. The key point in both cases, however, is that the innovative institutional solutions found in order to overcome the two dilemmas, have released the tension between bitterly opposing positions. Instead of noisy and destabilizing hostilities, the fiscal rule and the ethical guidelines have opened up conceptual and Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 We see it as very important to maintain broad political and popular support for the management of the fund. At the same time, we want to receive input from committed communities in Norway and abroad. We hope that these contributions can provide a basis for further strengthening the fund´s ethical guidelines. (Ministry of Finance 16 January 2008) 208 NORWEGIAN SOVEREIGN WE ALTH FUND Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 institutional spaces where disputes between different concerns can be negotiated so that workable compromises can be found. Secondly, in a programmatic sense, the fund has contributed to creating widely valued social outcomes. At the time the fund was formally established, Norway already had a generous, universalistic welfare state and a history of several decades of successful export performance. Increasing oil revenues threatened the latter, for all other sectors than oil and gas itself. Hence, the value proposition motivating the creation of the fund can be stated as an ambition to successfully safeguard and stimulate the economy and finance the welfare state simultaneously, without one getting in the way of the other. The policy was based on a theory of change which says that government spending can contribute to equitably distributed, beneficial social outcomes up to a certain point, but that total spending must be tightly controlled to avoid overheating and undesirable structural change. The theorized means–ends relationships that were assumed in the design process, and that still underpin Norwegian economic policymaking to date, have proved valid. Thirdly, over time, the fund has come to enjoy broad political support and has been a political success for a considerable period, even in the face of changing circumstances. For 20 years all governments (from both sides of the left–right divide) have stuck to the fiscal rule. The two political parties that used to advocate contrarian views on spending and ethical concerns respectively, the Progressive Party and the Socialist Left Party, have both held the position of Minister of Finance during the last two decades and both have faithfully managed the established economic policy regime without any attempts at implementing significant changes, indicating that association with the fiscal rule enhances rather than diminishes the political capital of voices that were highly critical when in opposition. The major corporatist players have never voiced substantial opposition to the regime, and popular support is reflected both in opinion data on attitudes to spending of ‘oil money’, with a majority agreeing that the government should not spend more petroleum revenues than it currently does (see Figure 10.3), and the withering away of opposition to the fund’s investment strategy. An assessment of the policy processes involved is more equivocal. The creation of both the fund itself and the fiscal rule were typical elite projects, and a somewhat surprising finding is the small number of players present at the table at the main decision points regarding the spending versus saving trade-off. The decisionmaking process was less consensual and inclusive than was to be expected in a democracy with a strong corporatist tradition. The reform does not sit well with the image of a corporatist democracy where organizations ‘take part in political processes and ensure important considerations are taken’ (Nordby 1999: 12). The closed nature of these processes secured programmatic success, but the exclusion of key stakeholders did, however, create challenges for the political legitimacy of the fund. CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 209 Lessons What lessons, if any, can be learned from the story of the Norwegian Governmental Pension Fund so far? One obvious takeaway is that institutions that enable running compromises (and in the case of the fiscal rule this happens yearly) facilitates endurance through reducing levels of political conflict. If we move to a lower level of abstraction, it is clear that the decision to draw up the guidelines for the oil fund as early as in 1990 stands out as particularly fortunate. A political debate on how to deploy the oil money was always going to be easier with an empty bank account than with a burgeoning fund. Thus, the Petroleum Act of 1990 created a strong path-dependency that guided policymakers through the later stages. New policy instruments were developed and adjustments were made as new considerations were built into the institutional structure. But the overarching policy goals of growing the economy and the welfare state harmoniously through carefully controlled spending growth have remained the same. While Norway had the institutional capability for reform, effective political leadership was required to capitalize on the opportunity and forge a new institutional structure that constrained the choices of future governments. In 1990, Skauge’s decision to go ahead with the Government petroleum fund Act against the advice of the Ministry of Finance’s mandarins was an important act of political leadership. In 2001, the creation of the fiscal rule was the result of a strong alliance between Stoltenberg and the administrative elites in the Ministry of Finance. In Stoltenberg, the top bureaucrats in the Ministry of Finance had a partner who both understood them and shared their goals. Furthermore, Stoltenberg moved on to become the pre-eminent salesman for the new macroeconomic regime for the remainder of his political career, and later considered the crafting of the fiscal rule to be his finest moment in politics (Stoltenberg 2016). Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 The lack of inclusion facilitated both a populist and an ethical backlash against the fund. However, the elite-driven decision making in the first phase of the reform was moderated by the more inclusive strategies followed at later stages. The construction of the fiscal rule ‘pulled in’ critical stakeholders and over time strengthened and grew the consensus behind the principles of the fund. It is also worth emphasizing that the second dilemma was resolved through a more inclusive process. The traditional institution of ‘Official Norwegian Reports’ or ‘Green Papers’ was mobilized. The commission headed by Hans Petter Graver recruited outside the closed circle of Ministry of Finance and Central Bank officials who had been running things up to this point. It also consulted broadly and subsequent suggestions for an ethics code and institutional set-up were passed into law more or less unchanged by a unanimous parliament. 210 NORWEGIAN SOVEREIGN WE ALTH FUND Poor and inegalitarian countries thus find themselves trapped in a situation of continuing inequality, mistrust, and dysfunctional institutions. High levels of inequality contribute to lower levels of trust, which lessen political and societal support for the state to collect resources for launching and implementing universal welfare programs in an uncorrupted and non-discriminatory way. In sum, the Norwegian macroeconomic regime, balancing current spending with long-term interests, compares favourably with most other cases of large resourcedriven income streams. On the one hand, the Norwegian experience is a result of unique factors. On the other hand, there are potential lessons to be learned. We argue that these successes depend on elaborate institutional structures that facilitate compromise over tough dilemmas. This holds for both the saving versus spending trade-off and the thorny issue of ethical investment versus conventional economic ideas of how to maximize returns. The spending dilemma was solved by resorting to a crafty combination of Chicago school economics and Keynesianism, in what we may term rulebased Keynesianism. While Chicago school thinking supplied the emphasis on rules and predictability, Keynesianism was the inspiration behind the notion of ⁹ A. Skauge, personal communication, 16 February 2017. Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 One mechanism that we see as having contributed greatly to the success of the fund, is related to discounting rates. Behavioural economics have shown that humans tend to discount the future at a much higher rate than is normally assumed by neoclassical economics. This has been taken advantage of by the renowned behavioural economist Richard Thaler with his concept for private pension plans, called ‘save more tomorrow’ (Thaler and Benartzi 2004). The point is that it is much easier to get employees to agree to set aside more of future income increases than it is to make them take monies out of their current income. Arne Skauge’s move when Norway was ‘broke’ in 1990 fits this logic perfectly. His own words on this bear repeating: ‘… the main principles of a petroleum fund had to be established before the money started pouring in. Once the money was there, politicians and interest groups from across the entire range would scramble to get money for their pet projects.’⁹ Norway had unique institutional capabilities and traditions compared to many other countries in similar resource-rich circumstances. According to Rothstein and Uslaner (2005), a long legacy of egalitarian distribution can at the same time facilitate, and be reinforced, by universalistic welfare institutions, which in turn help build and solidify interpersonal trust as well as trust in institutions. In contrast to this, most other countries with large oil revenues have political systems and political traditions that are far from the Norwegian experience. In the words of Rothstein and Uslaner (2005: 71): CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 211 Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 counter-cyclical spending across the business cycle. Similarly, the discourse on ethical and environmental concerns pitted two opposing positions against each other. The political majority and the economic experts argued that not only would ethical concerns reduce returns, but that this issue was threatening the whole idea of a non-political fund. When the issue became politically impossible to ignore, the concept of ethical concerns was redefined. The expert group suggesting new guidelines broadened the conceptualization of ethical considerations so that it came to include both an obligation to ensure savings for future generations and to respect the fundamental rights of third parties when making investment decisions. These conceptual and institutional innovations mirror long-standing traditions in Norwegian economic policymaking. As Peter Katzenstein (1985) argued in his analysis of economic policy in small, open (rich and European) economies: For decades they relied on strategies of ‘flexible adjustment’. A system that combined external openness with incomes policies in order to support wage discipline while keeping inequality growth at bay through said incomes policies combined with relatively generous welfare states and active labour market policies in order to compensate those working in declining sectors. The institutional structure surrounding this regime was corporatist, originally developed in the interwar-period. That is institutionalized arenas where the social partners met at elite level in relative isolation from their members, supported state-run expert bodies, like the Technical Calculation Committee for Wage Settlements or The National Mediator. These, in turn, enjoyed the trust of both the social partners and any given administration. In short, a system of institutionalized, knowledge based, but not always transparent compromise-making. Several elements of this institutional legacy are of direct relevance to how the spending and investing dilemmas were handled. At a macro level the fiscal rule mirrors the tradition of combining discipline with welfare spending. It’s a new institutional means to an old end, seeking to strengthen the strategy of flexible adjustment by securing that fiscal policy, like incomes policy, balances ambitious welfare state spending with a concern for competitiveness. The most obvious parallels when it comes to the ethics versus conventional investment logic is the resort to trusted technocrats or experts. Experts designed and manned the ethics council, while technocrats made up a skilled secretariat. The recipe for success in handling these complex matters was (re)conceptualize, institutionalize and insulate. The story of the fund´s two major adaptations highlights the importance of agenda-setting and framing for successful reform. A reform is far more likely to be sustainable if the policy is understandable and logical to the public, even when the motives behind the reform are highly complex and theoretical. The fiscal rule corresponded well with established frameworks for how Norway should exploit its national resources. When Stoltenberg launched the fiscal rule, he used the metaphor of sustainable forest management to explain the principle of the fiscal rule to the general public. 212 NORWEGIAN SOVEREIGN WE ALTH FUND Conclusions Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 The endurance of the policy is worth returning to as economic policy normally changes over time and is subject to shifting global conditions, attitudes and understandings of how the economy works or should work. Considering this, establishing a two-pronged institutional framework that endures over decades, delivering results in harmony with the public value proposition that motivated the policy in the first place, is a solid claim to success. However, the vision of the Norwegian petroleum fund for its investment portfolio is eternity, and 30 years is too soon to draw any definitive conclusions. The fund is invested in more than 9,000 companies and as a universal owner of 1.5 per cent of the global stock market, the fund is exposed to unexpected changes and potential crises in the world economy. The Norwegian economy is dependent on two markets: the financial market and the energy market—neither of them known to be particularly stable. Volatile oil prices might reduce the profitability of investments in the North Sea, but more important is the growing political consensus to transition to cleaner energy systems. The International Energy Agency (IEA) recently published a report defining key milestones in the pathway to net zero. One of their conclusions was that no new oil and gas fields should be approved after 2021 (IEA 2021). Historically, Norwegian political and administrative elites have supported analyses from the IEA, but the new report challenges the official narrative of Norwegian oil and gas production as being in line with international agreements on sustainable development (i.e. The Paris Agreement). There is still a political majority behind expanding production, but a growing share of younger voters are moving towards parties that do not support the opening of new fields, while there is an emerging discourse on if and when the ‘oil-age’ must come to an end. Thus, the success we have described in this chapter may to an increasing degree find itself resting on a paradox. The mandate of the fund is to safeguard wealth for future generations. For 30 years it has been taken for granted that the interest of future generations equals wealth which in turn equals financial savings abroad. The first part of that equation has at earlier junctures been challenged, albeit unsuccessfully, by actors who argue that real resources—that is, the product of real investment—is also a heritage worth leaving behind for future generations. This is a discussion which de facto boils down to a debate on the efficacy of industrial policy and an active state, a debate which has been more or less closed for the same 30-year period. Public spending on other purposes than welfare has been associated with risk of misallocation of resources, inflation and loss of competitiveness. Now, however, there are signs that the ground under this debate is shifting. Firstly, the climate agenda and the emerging consensus on the need for a green transition again pushes the state towards a more active role. The idea that the CAMILL A BAKKEN ØVALD AND BENT SOFUS TRANØY 213 Questions for discussion 1. What kinds of problems do resource-rich countries often run into, and why in your opinion is this so? 2. This chapter tells a success story about managing great wealth. What advantages did Norway have compared to most other resource-rich counties and states? 3. All political systems harbour conflicts and opposing interests and viewpoints. Why is the conceptual and institutional space within which such conflicts play out often very important? 4. In what ways can the emerging green agenda (potentially) undermine the stability of the Norwegian institutions that have been set up to handle the dilemmas the fund has given rise to? Links to online resources The Fund: https://www.nbim.no/. Ministry of Finance: https://www.regjeringen.no/en/topics/the-economy/the-governmentpension-fund/id1441/. The Ethics Council: https://etikkradet.no/en/. Sovereign Wealth Fund Institute: https://www.swfinstitute.org/news/. References Bay, I. 2002. Verdiløse penger? Oljefondet – veien mot etiske retningslinjer. Rapport 1/2002 Oslo: Framtiden i våre henders forskningsinstitutt (FIFI). Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 market, given correct incentives, can handle the whole problem, fast enough has also lost ground. The financial—and euro—crises, the accompanying notions of secular stagnation and slower productivity growth, and finally the weaknesses in global supply chains exposed by the Covid crisis are events and trends that tend to weaken the trust in unfettered markets. Thus we see that the window for discussing the role of industrial policy in moving towards a green transition may be reopening (Hjertaker and Tranøy 2021). And crucially for Norway, that this may challenge the terms upon which the two great dilemmas described in this chapter have been resolved until now. 214 NORWEGIAN SOVEREIGN WE ALTH FUND Downloaded from https://academic.oup.com/book/44441/chapter/376663097 by guest on 08 November 2023 Boin, A., L. Fahy and P.‘t Hart. (eds.). 2021. 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