Timmy elsewhereApril 14, 2013 Tim WorstallTimmy Elsewhere24 CommentsAt the ASI. Just how big was that North Sea oil money? previousSo who is really undermining freedom of the press?nextA slight problem with this southern European debt thing 24 thoughts on “Timmy elsewhere” Doug Young April 14, 2013 at 10:28 am Presumably if the money from the oil had gone into the Norwegian economy it would have caused rapid inflation and currency appreciation….? Tim adds: Yep. Dutch Disease Ian B April 14, 2013 at 10:33 am Now there’s a curious argument. Exporters are bad for the economy. Hmm. I don’t follow this; what is the actual argument? That the extra money will cause inflation or something? “Dutch disease”? NB too lazy to google. Tim adds: OK, the explanation. Exports mean someone out there has to buy pounds to buy the exports. Thus, however little, an export raises the exchange rate. If we’re producing something as a result of British industry being better/more competitive etc then this is fine. All just part of the general rebalancing that markets provide. However, if you’ve got some vast natural resource that you’re digging up then this is a problem. Your exports are not coming from hte general competitiveness of industry. They’re coming from pure blind luck about where the dinosaurs died with oil for example (or forests did, or summat). Thus you’ve a rising exchange rate and this helps to kill off your native industry. Exports become more expensive to foreigners, imports become cheaper for locals. Note again, not because of anything good or bad about local or foreign industry, but just because of pure blind luck. Venezuela suffers very badly from this: massive oil exports mean local industry is seriously handicapped. The name, “Dutch Disease” comes from Holland. They had natural gas (erm 50s? 60s?) and the exports put intense upward pressure on hte guilder. To the great detriment of local production. If the number is small then, well, just deal with it. But if the number is large (say, Venezuela oil, Dutch natural gas, Norwegian both) then the answer is to stick the money *offshore*. You do not buy Norwegian oil and gas in krone. You buy it in dollars. Which are then invested *outside* Norway. Big sovereign wealth fund, which is lovely. But the aim is to avoid a sky rocketing exchange rate and thus the death of all native industry. Ian B April 14, 2013 at 11:09 am Oh dear, that’s a lot to think about. *Brain starts whirring*. S0 here’s a naive question; what happens if you offset the rising pound by printing more pounds to devalue it? That is, you offset the “bonus” production of oil to bring the echxange rate back into balance? Tim adds: Then you get inflation. John Barrett April 14, 2013 at 11:32 am @IanB You cause inflation. Ian B April 14, 2013 at 12:05 pm Waittaminnit… Isn’t increased imports actually normal if you’re exporting more (the oil)? The oil is your best product (international division of labour and all that). So, you *should* be shifting your export focus onto the oil (less export from other sectors) and purchasing more imports with the proceeds. Aren’t the native industries that die effectively ones you shouldn’t be in? Otherwise, you’re trying to export more than you import. Which you can’t, in the long run. /sits back and takes a sip of Devil’s Advocaat Tim adds: Indeed, you can do this. And you end up with Saudi Arabai. Everyone lives off the oil money and no one in the country actually does anything. Which is just great of course: until hte oil runs out. Ian B April 14, 2013 at 1:00 pm So, just to clarfy, is this just advising us not to release tax revenues from dead dinosaurs into the economy too fast, or all revenues (i.e. prviate profits as well)?  Actually, giant horsetail ferns, to be a pendant. mike fowle April 14, 2013 at 2:52 pm I seem to recall Enoch Powell (I think it was) making this point when north sea oil first started coming on shore. It was not an unmixed blessing. Tim Newman April 14, 2013 at 4:15 pm Thus you Tim Newman April 14, 2013 at 4:18 pm Thus you’ve a rising exchange rate and this helps to kill off your native industry. There’s also another problem with flooding a country with oil money, one which Nigeria suffers badly from, and can be seen on a city-wide scale in any oil town, e.g. Yuzhno-Sakhalinsk, Aberdeen. If oil revenues are pouring into a town, pretty soon everyone not making their money (either directly or indirectly) from the oil business suffers badly. The oil revenues drive up wages, rents, the price of beer, etc. Which is fine if you’re making your money in the oil business, but if you happen to be an ordinary fellow making shoes (say) and suddenly your town becomes an oil town, you find yourself unable to afford the food in the supermarket or the beer in the pubs. Eventually, everyone else moves out leaving only those making money from the oil, which is why oil towns are somewhat unique (and generally shitholes). Nigeria has a similar problem: back in the 1970s they had fairly developed agriculture (palm olive plantations), manufacturing and assembly lines, and other secondary industries. At some point in the 90s the government started flooding the place with oil money, and everyone quit their industries to get a piece of the oil action. Now, there are few industries which are not in some way dependent on the oil industry, and the oil industry dominates the economy to the point that doing something else besides oil just isn’t worth it. This is a problem in a country of 180m+ people given that the oil industry, relative to its economic size, doesn’t employ many people. Ian B April 14, 2013 at 4:34 pm This seems to be straying perilously close to arguing that free markets don’t work because they create inequality. Surreptitious Evil April 14, 2013 at 4:35 pm So, just to clarfy, is this just advising us not to release tax revenues … or all revenues It all depends on whether the advantage these excessive revenues are dependent on is transferable or not. If they are not – as for a natural resource (note that sector subsidies are more complicated – they are transfers within the economy rather than factors affecting the economy’s performance relative to others*), then as the interest rate rises, the rest of the economy suffers. (And, as Tim N points out, they are not going to be transferable on the small scale – London re the financial markets has the same problem.) If they are: work ethic, collaboration to keep the labour share of revenue (not profit!) down, then you end up with something like Germany. Where the economy dominates the local or even world grouping. * Yes – and as the USA and the Eurozone both show, linking very different economic zones within a single economy causes complications. Surreptitious Evil April 14, 2013 at 4:39 pm This seems to be straying perilously close to arguing that free markets don’t work because they create inequality. No, you are misunderstanding. Where there is domination of a local economy by a single industry, this is unstable. Where other industries can build on the success of the local industry, then you can achieve local stability (i.e. 1960s & 70s coal towns in the UK) or where the revenue from the dominant industry is sufficient to subsidise the rest of the economy (i.e. Arab oil states – lower populations than Nigeria), then you can achieve a temporary balance. However, you are vulnerable to shocks in that dominant industry. Ian B April 14, 2013 at 4:55 pm No, you are misunderstanding. Well at least I’m consistent. You’ve got to give me that. Tim Newman April 14, 2013 at 5:08 pm This seems to be straying perilously close to arguing that free markets don Tim Newman April 14, 2013 at 5:09 pm This seems to be straying perilously close to arguing that free markets don’t work because they create inequality. There is a very sound argument that a free market in which oil production constitutes almost the entire economy does not generate sufficient employment to avoid serious social unrest. Which is why most petro-states pay their populations not to start any revolutions. Surreptitious Evil April 14, 2013 at 5:18 pm Actually, Tim’s argument extends to any commodity or industry once you get beyond subsistence “farming”. Multiple-sector economies are simply more stable. Oil is just the current dominant product for single-sector economies further negatively biased (as has already been pointed out) that it doesn’t actually employ (as opposed to, say, cod fishing & treatment) that many people. Dave April 14, 2013 at 7:54 pm Ian> Bear in mind that the SWF isn’t a perfect solution, just a reasonably good one. Ideally (some of) the money from oil sales would instead be spent on increasing the productivity of exporters as much as is needed to offset the exchange-rate rise. The problem in the case of a modern industrialised country like the UK is that we’ve no idea how to make that happen. Somewhere like Nigeria, which has an infrastructure and industrial deficit, it’s easier to do – no idea if the Nigerian government have pursued such policies; probably not. bloke in france April 14, 2013 at 9:28 pm The resource curse / dutch disease is often cited but rarely seen. Singapore and HK are rich places with no minerals but they do have an inexhaustible resource, the harbour. I think it probably happens (I’ve seen people doing nothing in hopes that the oilmen will come along and do something) but maybe more work needs to be done (ASI? are you there?) on how widespread the problems are geographically and socially. Bear in mind that the biggest winners from the ’49 gold rush were whorehouses and the biggest winners from modern transport are wharehouses. Tim Newman April 14, 2013 at 9:29 pm Somewhere like Nigeria, which has an infrastructure and industrial deficit, it Tim Newman April 14, 2013 at 9:31 pm Somewhere like Nigeria, which has an infrastructure and industrial deficit, it’s easier to do – no idea if the Nigerian government have pursued such policies; probably not. Industrialisation and infrastructure upgrade projects are rolled out by the dozen on a weekly basis in Nigeria. In 100% of the cases the allocated money is snaffled quicker than you can blink, and nothing gets done. Richard Allan April 15, 2013 at 10:47 am Screw WordPress… “Tim adds: Indeed, you can do this. And you end up with Saudi Arabai. Everyone lives off the oil money and no one in the country actually does anything. Which is just great of course: until hte oil runs out.” That’s the standard argument for protectionism. “Sure, we can buy stuff more cheaply overseas and neglect our own producers, but what happens when the overseas supply dries up?” I think the argument is equally invalid in both cases. To avoid any “exchange rate” malarkey, let me set it up differently. The government takes in a certain amount of revenue. It spends the necessary amount on public goods, and the surplus is used to fund a “job guarantee”. Everyone who applies for a make-work job gets 60 hours of work a week in exchange for an equal share of the surplus. Now, suppose the surplus increases exogenously thanks to oil revenues (or whatever, it doesn’t matter). The amount available for the job guarantee will increase, so the effective wage will increase. This will suck workers out of the productive sector of the economy, reducing production. Does this mean people get worse off? Not on your life! As Ian B has already pointed out, the country is simply specialising in its comparative advantage. By investing the money overseas at a lower rate of interest than you could earn at home, you’re essentially making a gift of your oil money to overseas workers. MyBurningEars April 15, 2013 at 11:28 am Richard Allen: “By investing the money overseas at a lower rate of interest than you could earn at home, you MyBurningEars April 15, 2013 at 11:33 am “re essentially making a gift of your oil money to overseas workers” Doubt that a Norwegian SWF could get higher returns by limiting investments to Norway, than if it could invest anywhere on the planet. For a Nigerian SWF… maybe different in theory, if not in practice! Bernie G. April 15, 2013 at 1:44 pm North Sea Oil wasn’t huge, relative to the economy as a whole, but it made the difference – especially in Aberdeen, which was little more than fishing, farming, the paper mills and Crombie overcoats. 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