Sunday, December 18, 2011

Norway the near-miss-Persian-Gulf-state

Matt Yglesias* has an interesting column.

He shares my concern with a purely open-borders free-trade stance by risk-averse concerns about what happens when a nation puts all its economic eggs in one industry's basket (although he speaks mostly about Dutch Disease, which doesn't strictly have anything to do with that risk particular risk, but with currency valuation and its consequences for domestic industry competitiveness). And it's impossible to disagree with the conclusion that Norway has been very successful at avoiding becoming "yet another Saudi-style oil monoculture".

But, let's review. Dutch disease occurs when a large exporting commodity industry brings a lot of money suddenly into the country which drives up the value of the currency, making foreign goods cheap to export, which reduces the competitiveness of other domestic industries, which leaves the country dependent on this one industry for most of its income. There are a few ways to avoid this outcome. You can artificially reduce the competitiveness of foreign industries through protectionist policies like tariffs and subsidies. You can boost the competitiveness of domestic industries by investing in human capital, research and development, infrastructure, etc. Or you can stop the currency shock by setting aside commodity income as some form of savings.

These measures are not equally good. The last one allows the country to smooth the commodity income over time, reducing the impact of booms and busts in that particular commodity market on national income, and allows the benefits of the commodity income to be spread out over generations in whatever way desired. Investing in education/R&D/infrastructure is great for obvious reasons. Artificially changing the competitive balance via subsidies and tariffs, though, distorts incentives in a cherry-picked set of industries chosen via political whim, which can lead to major inefficiencies as soon as the situation changes at all (such as, for example, the current comical butter shortage that motivated Yglesias's post.) Beyond that, it can actually worsen the currency situation, since tariffs on imported goods reduces demand for foreign currency, driving the value of the domestic currency even higher.

With this in mind, Yglesias is first of all clearly much too quick to lump together Norway with those Saudi states. Ceteris not at all paribus. The culture and institutions and fiscal choices are radically different in many ways; the protectionist policies of the Norwegians likely explain a tiny fraction of the difference in overall outcomes. In particular, I'm guessing (by which I mean I'm pretty sure but don't want to compile proof just for a blog post...) they have a much stronger and longer-term commitment to investment, both for its own sake and as the 2nd Dutch Disease mitigation method I mentioned above, than most Saudi-style oil states.

Second of all, he glosses over the differences between those mitigation methods. Since the combination employed by Norway has been successful overall, he claims that the particular protectionist tactic is vindicated. That's obviously not a valid argument. (In fact, he mentions that the national savings fund is a much more important aspect of their efforts to avoid Dutch Disease, but then glosses over the differences between the methods again.)

All in all, though, it's nice to hear support for protectionism being motivated by rational long-sighted economic logic, rather than the short-sighted knee-jerk yet ubiquitous "stop the mean foreigners from stealing our jobs" rhetoric. I'm so happy about that I almost don't want to bother nitpicking with the details. In fact, I'd call this more of a clarification than a counterargument, since his ultimate point is just that avoiding Dutch Disease is a good goal and the Norwegians should be admired for trying, even if it leads to silly butter shortages.

*It's nice to see him writing longer form stuff now that he's at Slate. (At least, I think it's a higher percentage of his posts, at quick glance...)

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