Scotland, like the rest of the UK, has suffered heavily during the Great Recession. High unemployment, stagnant wages, and soaring living costs have been compounded by crippling austerity that has not only cut needed public spending, but also failed in its stated goal of encouraging growth and reducing debt. With Britain narrowly avoiding its third downturn since 2008, there are few signs of relief in sight. Such troubles only underscore the significance of the ongoing debate about Scottish independence, as if the SNP is able to make the case that the country would be better off on its own, staying in the UK could, for a large part of the electorate, lose much of its appeal. Many dismiss the idea of an economically viable Scottish state as a fantasy, suggesting that an independent Scotland would not be able to maintain its current spending levels, competitiveness, and access to global markets when shorn of the protection and assistance of Westminster. But such pessimism is unwarranted. To understand why, and to get a glimpse of the kind of state that Scotland can and should aspire to be, one only needs to look across the North Sea to what is, by almost any standard, one of the most remarkably successful independent states in the world: Norway.
The reasons for Norway’s appeal are obvious. Its HDI (0.955) is the highest in the world, while the country has topped the UN’s annual human development ranking more than any other. Its per capita GDP, as adjusted for purchasing power parity, trails only a handful of small states, and is the highest in the world per labour hour. In 2012, its economy grew faster than any in the European Union (which Norway is not a member of), and at 3%, its unemployment rate is the lowest in the OECD. According to its National Budget, the country is projecting a fiscal surplus of 380 billion NOK (41.8 billion GBP) in 2013, while current government debt stands at 29% of GDP. While most of the developed world is suffering from protracted stagnation and economic mismanagement, Norway is booming. But what can the rest of the world learn from it?
Not a lot, sceptics claim, pointing out that much of the country’s recent economic success can be attributed to its large North Sea oil reserves. Such an argument indeed has merit: oil accounts for 30% of government revenue, and the country is the fourteenth largest producer and sixth largest exporter of oil in the world. But the reality is not that simple. In per capita terms, Norway’s proven oil reserves are actually quite modest, with even the most generous estimates suggesting an upper limit of around 1.35 million barrels (MMbbl) of oil for every one thousand people in the country. This figure is hardly remarkable, especially when compared to countries like Kuwait (39.57 MMbbl), Qatar (13.57 MMbbl), Venezuela (10.16 MMbbl), Saudi Arabia (9.51 MMbbl), and Canada (5.08 MMbbl). A total of 14 countries have larger per capita oil reserves than Norway, some by dramatic margins. Yet Norway consistently outperforms them all across common economic and development indicators. Being blessed with valuable natural resources is one thing. Knowing what to do with them is something else altogether.
For it is what Norway has done with its oil that is truly impressive. By maintaining significant control over the country’s oil industry, particularly through its 67% share in Statoil, the primary oil company in the region, the government has guaranteed for itself a substantial long-term revenue stream. After necessary expenditures are met, this money is reinvested in two sovereign wealth funds: the Government Pension Fund – Global (SPU) and the Government Pension Fund – Norway (SPN). With a current value of 3.816 trillion NOK (419.79 billion GBP), the SPU is the largest pension fund in the world, with assets equal to 140% of Norway’s annual GDP. Its value grew by 13.4% in 2012 and is expected to surpass 1 trillion USD (650 billion GBP) by the end of the decade. The SPU is so strong that its international investments total 1% of the value of world stocks. The SPN, while significantly smaller, is dedicated solely to domestic investments, and, with a value of 154.93 billion NOK (17.042 billion GBP), plays a major role in Norway’s economy. In total, the Norwegian government directly holds 37% of the value of the Oslo stock market, in addition to its ownership interests in a wide variety of unlisted companies. The proactive role that the state has played in managing the country’s oil wealth reflects its central position in the country’s economy more generally. The public sector accounts for 52% of Norway’s GDP, and 30% of total employment. The government’s annual tax revenue equates to 43.6% of GDP, a figure that trails only Denmark (49%), Belgium (46.8%), Sweden (45.8%), and France (44.6%) in the OECD. A combination of progressive taxation and wise public spending has lowered the country’s Gini coefficient to 0.258, making it the second most equal in the world; only Sweden, another adherent to the so-called Nordic model, can boast of a smaller gap between its rich and poor. Norway not only has oil; it also has a strong and effective state that is deeply committed to both social progressivism and high levels of economic growth. That is the key to its success, and there is no reason why other developed countries cannot learn from it.
But would this model be exportable to an independent Scotland? More than 90% of Britain’s North Sea oil reserves are in Scottish waters, meaning, in effect, that Scotland’s share of the British government’s revenues is higher than its share of expenditures. Scotland may receive more from HM Treasury than it puts in, but all of Britain does given the size of the country’s current budget deficit. An independent Scotland would have a per capita GDP that is 15% higher than the rest of Great Britain, and, more importantly, would also be able to use its oil revenues as it saw fit. Alex Salmond, a former oil economist, has already expressed his desire to use Scotland’s oil revenues to establish a sovereign wealth fund modelled on Norway’s SPU and SPN. While Scotland’s proven oil reserves total only about 0.476 MMbbl per thousand inhabitants, estimates of possible reserves suggest this figure could perhaps be ten times as high. Even if the dramatic successes of Norway’s sovereign wealth funds cannot be entirely replicated in Scotland, it is difficult to argue against the wisdom of such a plan. But an independent Scotland must go further if it wants to reproduce Norway’s successes, and strengthen, not further weaken, the economic role of the state while deepening its commitment to guaranteeing a high standard of living for all, not just some, of its people. Oil can play a central role in establishing a viable and prosperous Scottish state, but with North Sea oil production already declining, time is running out.
The discovery of North Sea oil has provided history with a fascinating natural experiment. In the early 1970s, the average Norwegian was poorer than his or her average British counterpart. Now Norway’s GDP per capita (PPP) outperforms that of the UK by almost 70%, while its HDI ranking is a full 25 places higher. The reasons for this dramatic divergence of fortunes are obvious. While Norway has maintained high levels of state ownership in its oil industry, the UK has pursued large-scale divestment and privatization. While Norway has planned for the future, the British Government has squandered much of its North Sea oil wealth in masking the economic failures of Thatcherism and its successors. And while Norway has strengthened its welfare state and ensured its prosperity for generations to come, Britain has largely turned its back on its own and is now paying the price. There can be little doubt as to which model has been more successful. Perhaps the people of Scotland will decide to vote for change next September, and finally start transforming their country into the kind of state that it should have been all along. Better late than never.