Message #52940

[Psalm 51:17]

http://www.forbes.com/sites/timworstall/2014/09/14/it-would-be-impossible-for-an-independent-scotland-to-establish-a-sovereign-oil-fund/
9/14/14
It Would Be Impossible For An Independent Scotland To Establish A Sovereign Oil Fund

One of the more snigger worthy aspects of the case being promoted for Scottish independence is that the country would be able to establish a sovereign oil wealth fund, along the lines of Norway, and thus wax fat and rich off into the future. My own political prejudices are that I’m overjoyed at any argument at all that makes it more likely that there will be a yes vote: but this particular reason simply doesn’t stand up to a moment’s scrutiny. It doesn’t stand up for two reasons, one theoretical the other a matter of simple accounting.

We’ve Sir Ian Wood insisting that it would be very difficult of Scotland to have such a fund:

    North-east oil services tycoon Sir Ian Wood has claimed it would be “extraordinarily difficult” to establish an oil fund in an independent Scotland.

    The Aberdeen-based industry expert yesterday said it was not possible to squirrel away money while spending it on public services at the same time.

I would upgrade that extraordinarily difficult to impossible myself. For you only get to use the one lot of money once. Yes, even the miracle of the Keynesian multiplier doesn’t actually let you use the same pile of cash twice. So, if you’re using (as the Scottish and British governments are and have been all along) the resource rents and profits from the existence of North Sea oil to pay for social security spending, or lower than otherwise would be the case tax rates, then you cannot at the same time be putting that cash into a wealth fund. This is just a matter of simple accounting. And no, no one does believe that a newly independent Scotland will be willing to either raise taxes in that country, or cut current services, so as to be able to sock that oil revenue away for future generations. It’s simply not going to happen.

The second problem is a more theoretical one. The Norwegians didn’t have a wealth fund in order to make life easy for the future. They actually had it so as to avoid Dutch Disease. When Holland found vast gas reserves back in the 50s it found that exporting all that energy meant vast piles of loot entering the country. This is great: until you note that your exchange rate is therefore spiraling ever upwards. This makes imports cheap, exports expensive and you find, at the extreme, that you’ve no economy left other than the extraction of that natural resource: plus a whole series of import agents. To avoid this you’ve got to stop that money entering the domestic economy: and that’s what the Norwegians have done. The whole point of the wealth fund is that none of it, not a penny (perhaps a little bit of the returns from it) is allowed to enter the Norwegian economy. It’s not in krone, it’s not spent in Norway, it’s not invested in Norwegian industry, it’s not spent on social services either. It’s all invested in other currencies and in other countries. This avoids killing off the rest of the Norwegian economy.

Arguably this is what Venezuela should have done as well: there’s a good argument that over and above the Chavista idiot socialism the country is suffering badly from Dutch Disease. But of course doing so wouldn’t get a left-leaning government elected who promised to spend the oil wealth on improving the lives of the poor.

And that’s where the other of Scotland’s problems would lie. No one at all is suggesting a wealth fund that would go invest in England, or France. But that’s what would have to be done to mimic Norway: they’re all in fact arguing that a wealth fund should invest in Scottish industry. Exactly what is not the point of having one.

There is of course one final complication. Scotland has asserted that it would retain the pound sterling. Meaning that it wouldn’t actually be possible for them to suffer from Dutch Disease anyway as the foreign exchange value of their currency will be set by the vastly larger rUK economy, not whatever is happening with oil up north.

So Scotland can’t suffer from the original problem that leads to a wealth fund, they wouldn’t invest in in foreign parts either, and they can’t actually build one while they spend that oil money on current pleasures anyway. I’d say it’s a lot more than difficult, it’s impossible that Scotland will have an oil wealth fund.