There are many schools of thought on how to manage natural resources. The idea that a non-renewable resource “gifted” by nature to a country is something that should be considered a once-off benefit begs the question of how forward-thinking that nation is. If a country happens to have a wealth of a mineral resource, should the current generation use it for their benefit alone or should future generations of the country also benefit?

This also raises prognosis into an important distinction is between wealth and income.

A non-renewable resource is a good that can only be consumed once such as oil and gas. They are distinct from renewable resources such as forests and fisheries in such a way that, if managed properly can give a sustainable stream of income for all time. Some non-renewable resources can, of course, be recycled, and most metals and some fossil fuels fall into this category.

A goldmine, for example, should be viewed as a source of wealth (and not just income and profits for the company mining the yellow stuff). And while this sounds normative, no single generation has the mandate to spend that wealth in their lifetime. The wealth must instead be preserved for future generations and only the income (mainly in the form of interest) from that wealth be used by the current generation – just as with a normal personal wealth fund.

Norway* (if not now one of a few) is the only country in the world that consistently applies the principle of intergenerational fairness. The revenue that Norway contracts from oil and gas have since 1990 been collected in a fund that currently stands at over $1 trillion – and growing every second!

The wealth is converted into money and the value preserved. This (sovereign) fund is maintained for future generations, and only the interest earned from this wealth is used for the current generation.  In this way, all future generations will benefit from the ‘lucky situation’ of the country.

The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population – Norges Bank (The managers of the public fund)

In intergenerational economic terms, this is the only correct way of using the non-renewable assets of the country, and it is encouraging that other countries are looking to the Norwegian model.

 

 

A different school of thought is that some of the wealth can be invested to create future growth that will provide better sustainable income for the country. Many Middle Eastern countries are prime examples. They invest the revenue in construction projects to create a platform for economic prosperity. This is seen in the vast projects in the UAE cities of Dubai and Abu-Dhabi – which aim to produce sustainable income for the region when the oil runs out. It is an interesting illustration of Say’s law – in which supply creates its own demand.

Will the investment in infrastructure enable these countries to sustain their level of wealth for all future generations or will they 200 years from now be vast cities in the desert; a legacy to a time where opulence and abundance purveyed?

Read more about sustainabilty and human irrational behaviour here.

In most developing countries, like most of Africa, there is no consideration for future generations. The wealth of non-renewable resources such as gold, platinum and diamonds are used in today’s budgets with little thought that this wealth could one day not be there and should not be spent now.

The wealth inherited from previous generations is thus used to finance an unsustainable level of consumption.

The main lesson to take from this is that a non-renewable resource can only be used once. It is a precious endowment that is bestowed upon the country by luck or good fortune and it is therefore selfish to use it on the current population. It is not income, but wealth. This distinction is alien to most but is very important. Wealth is something that should be preserved.

The three basic options facing a country are: spending it, as most developing countries do; preserving it, as Norway does; or one can invest it in future sustainable growth, as the United Arab Emirates does. The choice is ours.

*Revised and originally written by a Norwegian economist workingd for a Sovereign Fund company that has since moved to the Private Equity sector.
Advertisements

4 Comments

  1. If to speak about future generations, non of these models of savings and investment secure real value for future generation. The Norwegian model, is exchanging natural resources to money, invested in certain monetary form, probably most of it in securities of US dollar or Eropean Euro bonds. Since price of everything is relative to its scarcity, and both these economic regions are more and more in debt, meaning they create more and more money, i hardly can see how any monetary investment can keep its value for future generations. As to Dubai, Emirates, etc. they invest a lot in envelope, but very little to content. The content should be well educated people, improving from one generation to other. I can’t see how it will happen within their despotic cultural, political system, where most of the economicly productive people are foreign workers, practically enslaved, and women are closed into their homes, and only sometime can go, escorted by someone to malls for shopping. These women, who are disconnected from the real world, will bring up the next generation of kids. What kind of investment model is it?
    The only investment securing wealth for future generations is investment in education of people if all ages to critical, scientific, creative thinking and projects of global environmental sustainability. Not the Norwegian and not the Arab Gulf countries have this. They both act on level of national-centric way, and in world, where in next generation about half of the world population will have to to relocate from their home land, due to overpopulation and environmental catastrophe, no country will be safe, not with mountains of cash money and not with accumulated concrete and glass.

    Liked by 1 person

    1. Totally agree with your outlook on the real concept of value however, the model still serves a purpose especially with the funds’ mandate to strictly engage/invest in initiatives, businesses and practises that don’t support child labour or any form of illegal work exploitation. And while converting to money is counter- productive, it is currently the only quick (liquid) and transferable form of value – well, until the advent of cryptocurrency. It would be interesting to know if some of it is driving Bitcoins surge in price 😏 Converting the investment timely to something ‘more concrete’ should be the next level because as you pointed out, money (or debt for that matter) can lose value or be defaulted upon – so the fund will have to evolve quickly as well and hopefully smart minds are behind its management.

      One has to look more into the models especially the Norwegian one before passing judgement on what they have contributed, not only locally but to the world and we will be posting (thanks to your comment) another follow-up piece highlighting the spillover effects: contribution to education and environmental sustainability.

      Don’t see Norway being an abuser of the above-mentioned because they have a relatively high education level (and thus per capita standard of living). They are also quite eco-conscious so we will have to substantiate this point better.

      As to how the funds are managed, there are many other countries with oil-rich Nigeria being an extreme case! Our previous post on sustainability is a sad reminder of the human irrational
      behaviour (sadly often driven by the vehicles of culture,perceived norms and religion etc) – have a read of that and let’s hear your thoughts…

      But you put forward some really salient points here! Thanks for reading.

      Liked by 1 person

  2. …..annihilation of hunger in the world. Sime of them do it, but not enough and to little. I have no expectations any more, that national leadership will do anything in the issue. They are to absorbed with being reelected, to put attention to long term global problems.

    Liked by 1 person

  3. I would say the following idea of free income, seems to me great for the Norwegian future funds. I wouldn’t expect anything positive from the Arabia Golf oil producing countries. In Saudi Arabia, lots of citizens are kept in ignorance and poor condition, not to speak about the foreign workers from underdeveloped mainly Muslim countries, like Bangladesh and Pakistan, almost half of the population, who are kept in almost slavery condition. Interestingly, when half of the population of Syrian and Iraqi Suny Arabs, were forced to become refugees, they filled all the surrounding countries and Europe, but non of them or very few moved to Saudi Arabia and Golf countries. So no aid can ve expected from them.

    I would add one more thing, proper education, proper meaning, based on criticism and creative thinking is a must. No political leadership likes it, since they political basis is founded on ignorance of masses. But private companies, mainly technology based global companies are different. They don’t pay taxes, so they should do what governments don’t, to take responsibility for proper education and annihilation

    https://wp.me/p7QaZT-2dL

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.