Lessons from Norway

A look at the Norwegian Oil Fund, one of the world’s largest Sovereign Wealth Funds, might prove instructive for Israel.

By JEROME VITENBERG
The Tamar gas processing rig off the coast of Israel 370 (photo credit: Noble Energy)
The Tamar gas processing rig off the coast of Israel 370
(photo credit: Noble Energy)
The discovery of gas by Israel in the Mediterranean Sea has led to discussions about the establishment of a Sovereign Wealth Fund, while a wave of optimism regarding to the financial safety of the country has washed over the government.
For some perspective, a look at the Norwegian Oil Fund, one of the world’s largest Sovereign Wealth Funds, might prove instructive. Rubbing the varnished surface of the NOF, some scratches appear which may augur a morose future for Norway.
So what are the lessons Israel can take away from the Norwegian case? First, a major element in evaluating the financial health of a country is external debt. The Norwegian Oil Fund may reach $740 billion in value, which, it is claimed, will be kept for future generations. However, the country’s foreign debt is $657b. This sum, as well as its yearly engendered interest, will also need to be paid by future generations, meaning that in fact the true net value of the NOF is a mere $83b.
Israel’s foreign debt of $104b. generates yearly interest of approximately $1.8b. Hence, prior to any other use of its proposed gas fund, Israel should consider decreasing its foreign debt through the allocation of a part of the fund to its reimbursement.
This would increase the net wealth of the country, decrease the yearly interest payments and increase global trust in Israel’s economy.
By relegating the country’s foreign debt to the back burner while using the new income for other purposes, the current generation might feel better, but our children and grand children may have some hard questions further on regarding our bequeathing to them our current expenses.
SECOND, IT is quite understandable that when it’s raining gold, some disagreements over what uses to put it to are expected; inter-ministerial and parliamentary discussions about the use of the gas fund have been tense in Israel.
Among the groups of experts lobbying for the investment of the gas income, bankers and financial managers, motivated by six-digit salaries and bonuses, advocate that it be invested in bonds, stocks and other financial tools, which are often too complex to be understood by the vast majority of people.
Economics professor Michael Hudson warned Norwegians in 2011: By investing in unstable BRIC economies and volatile real estate, we can generate short-terms profit, but it is a dangerous game.
Today, following the world economic-monetary crisis, the Israeli public understands the risks of having their wealth invested in a risky international environment. Therefore, within the framework of a more general debate about what portion of the Israeli gas fund to invest, a distribution between foreign financial investments and non-financial investments should be examined further.
With regard to the NOF, a third topic of interest is the hyper-concentration of the country’s economy in oil, at a period when demand for oil is in decline due to the improvement of alternative sources of energy. Although gas is less exposed than oil with regard to global and local market demand, the danger of too great a focus on gas and its derivatives still exists in Norway.
In Israel, it seems this has been well understood by economists, with multiple warnings about the “Dutch disease” reaching the public and the decision-takers.
Here, again, we could note Professor Michael Hudson’s recommendation to the Norwegians that 60% of the oil fund be invested in domestic and regional enterprises or infrastructures defined as being of “national interest.” Creating a list of areas responding to the designation “national interest” may be an interesting challenge in Israel, and would certainly be appreciated by the future generations.
Lessons learned from the NOF could be useful to Israel: Use a portion of the gas fund to decrease the country’s foreign debt; limit foreign financial speculation and prioritize “national interest” industries.
Leading Israel toward successful accomplishment of these may involve deliberations that the contemporary public would treasure. Tomorrow’s generation will certainly value them.The writer has taught political science and international relations for the London School of Economics via the University of London International Programmes at DEI College, Thessaloniki, Greece. He is a political analyst with a special interest in international affairs.