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Does the Norwegian Petroleum Fund

help the country to escape from Dutch

Disease?

Bachelor Thesis Economics and Business Author: Wenyi Wang

Student number: 10418628 Supervisor: N. Ciurila MSc July 15th 2014

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Table of Contents

1. Introduction ... 3

2. Dutch Disease ... 6

2.1 Resource movement effect ... 7

2.2 Spending effect ... 8

3. Background information on the Government Pension Fund of Norway ... 9

4. Model ... 13

4.1 Labor force movement ... 13

4.2 Appreciation of real exchange rate and Model 1. ... 13

4.3 Model 2. ... 14

5. Data ... 15

6. Test result and analysis ... 18

6.1 Labor force movement ... 18

6.2 Model. 1. ... 19

6.3 Model.2. ... 19

7. Conclusion ... 20

References ... 22

Appendix ... 22

Appendix 1. Consumer Price Index ... 24

Appendix 2. Nominal Exchange rate USD/NOK ... 25

Appendix 3. Annual Inflation rate in Norway ... 26

Appendix 4. Market Value of National Petroleum Fund in Norway ... 27

Appendix 5. Export Revenue of Petroleum Sector – Norway ... 28

Appendix 6. Regression on Model 1. ... 29

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1. Introduction

In the 1960s, significant oil and natural gas reserves were discovered in the North Sea (Glennie & Kw, 2009, p. 1). The discovery and exploitation of the oil fields and natural gas fields not only helped the Netherlands, the United Kingdom and Norway dispose of the shortage of energy resource but also brought them enormous economy benefits rapidly. Oil and its derivative industries created a lot of jobs in these

countries. The appreciation of Guilder, Pound and Krone followed the export boom of gas and the competitiveness of the manufacturing and service sectors were reduced, thus triggering a series of economic problems. This phenomenon was named Dutch disease since it happened in the Netherlands firstly. Norway was a poor, agrarian country before 1970 (Larsen, 2006, p. 605). In order to escape from Dutch disease and produce more surplus wealth for future generations, the Norwegian government established the Government Petroleum Fund which is commonly known as the Oil Fund.

Figure 1. The Importance of Gas and Petroleum Income in Norway (NORWEGIAN PETROLEUM DIRECTORATE, n.d.)

As a country with a population of only five million, the low demand of oil and gas in domestic market made it possible to export the majority of its natural resources. Norway is now the world’s third largest natural gas exporter and the world’s seventh

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largest oil exporter (Mundi, 2014). Benefiting from the exploration of oil and natural gas, Norway experienced a Gross Domestic Product (GDP) per capita of 97013 US Dollar which is the world’s second highest (International Monetary Fund, 2015). Figure 1 shows that in the last decade, oil and nature gas revenue accounted for approximately 20 percent of GDP and around 50 percent of export revenue (Norwegian Petroleum Directorate, 2015). The petroleum industry is definitely Norway's largest industry. However, reserves of natural resources are not infinite. As is shown in Figure 2, the number of daily production had its peak in 2001 and

plummeted since 2002. How to manage the large amount of oil income to leave the future generations a sustainable wealth are an important work for the Norwegian government. The Norwegian government established the National Pension Fund Global (the National Petroleum Fund as the former name) in 1990 to manage this wealth and prevent Dutch disease. The majority Income of Petroleum industry are put in to the fund and not allowed to be used in the domestic market. Only a small part of the fund are used to invest in foreign countries such as the U.S., China and European Union. A limited part of the interest of the fund are allowed to be used on social welfare in Norway each year. Now, the National Petroleum Fund of Norway has been established for 25 years. The Fund value is more than 6.7 trillion Norwegian Krone (NOK) in 2015. The country is now one of the world’s richest countries due to the oil and gas exportation. Whether the fund has worked efficiently to help the country to escape from the Dutch disease worth to be discussed.

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Information Administration, n.d.)

This paper is going to discuss whether the National Petroleum Fund of Norway helped the country to escape from Dutch Disease by using regression models and analysis. The rest of the paper is organized as follows. In Section 2, the effects and criteria of Dutch disease would be discussed. In Section 3, some general information about the National Petroleum Fund would be introduced. The regression models would be introduced in Section 4. Section 5 shows data resources and results of the quantitative study conducted with the model provided in section 4. Section 6 presents some concluding remarks.

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2. Dutch Disease

After the discovery of the large natural gas field in Groningen in 1959, the

Netherlands enjoyed a rapid and immense economic growth. With the exploitation of natural gas, the amount of export soar up. From the late 1960s onwards, exports of goods and services have increased from less than 40 per cent of GDP to 65 per cent (Corden & Neary, 1982, pp. 825 - 826). The Netherlands enjoyed a large balance of payment surplus and economic prosperity. Meanwhile, the country became a natural gas export-oriented country instead of a manufactured goods export-oriented country. This ostensibly positive development had serious impacts on some important

segments of the country’s economy since the booming export lead to an appreciation of Dutch Guilder. As a result Dutch non-oil exports are relatively more expensive and non-oil industry was shrinking

Dutch guilder became stronger, making Dutch non-oil exports more expensive and, therefore, less competitive. The unexpected wealth reduced its incentive to innovate, eventually lost its international competitiveness in many fields, domestic economy undergone a series of changes. Economists call this syndrome “Dutch Disease” (Corden & Neary, 1982, pp. 825 -848).

This syndrome has seizure in many countries around the world, both resource-rich commodity exporters and non-resource-resource-rich countries. Any countries with a large inflow of foreign currency such as a surge in price of natural resource and direct investment of foreign investment are able to cause Dutch disease although it is mainly incentive in the discovery of a nature resource. For example, in the 16th century Spain was influenced by the large amount of American treasures and Australia also had similar syndrome when gold reserve was discovered in the 1850s.

In the model of Dutch Disease attributed to Corden and Neary (1982) indicates that in a small open economy there are three produce sectors, Tradeable Booming Sector, Tradeable Lagging Sector and Non-Tradeable Sector. Tradeable Sector represents the energy industry and the Lagging Sector represents the manufacturing industry. Non-Tradeable Sector represents all services. The assumptions of the model are as follow:

• Production of all the three sectors are determined by labor; • Labor can move freely between the sectors

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• All goods are final products; • Trade is always balanced;

The booming of a resource influence the country’s economy through two channels: the resource movement effect and the spending effect.

2.1.1 Resource movement effect

Figure 3. Effect of the boom on the labor market (Corden & Neary, 1982, p. 828)

The booming in the energy sector raise the labor’s value of marginal product in the booming section and raise the equilibrium wage. In Figure 3, the vertical axis shows the wage and the horizontal axis indicates the distribution of labor. Ls and LT represent the demand curve of labor in service and booming sector. LM is the demand curve of labor in the manufacture sector. As is shown in figure 3, the booming of resource moves wage from W0 to W1 since LT moves left to L’T on LM curve. The higher wage attracts labor move to the booming sector out of manufacture and service sector. As total amount of labor is constant in short run, the other sectors have to increase wage to attract labor. As a result, the

manufacturing cost increases which weaken the competitiveness of manufacture section. Meanwhile, the export of natural resources lead to increased foreign exchange earnings and lead to an appreciation of home country currency. Once

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again this hits the competitiveness of export of the manufacturing sector. This is called resource movement effect. This effect leads to a shirking of manufacturing and service sector.

2.1.2 Spending effect

The spending effect is the situation that after a certain period of time, labor force would move back to non-tradable sectors and reduce the demand of the booming sector. Producing of the new discovered nature resources bring a large amount of extra income, especially when a large proportion of the production are export to other countries. When the extra income is spent directly by the owners of resource factor and increases taxes collected indirectly, it increase the price of non-tradable sector relatively. Therefore, the labor force would start move back to non-tradable factor from tradable factors and shift away the demand of tradable factors.

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3. Background information on the Government Pension Fund of Norway

National Petroleum Fund of Norway is an important way that Norwegian government applied to manage the extra income owned from oil and natural gas industry. Oil and natural gas, as the non-renewable resources, will be exhausted one day in the near future. How to transform these resources into wealth so that future generations could be benefited is the main object when the Norwegian government decided to establish the National Petroleum Fund. On June 22nd, 1990 National Petroleum Fund was established by the Norwegian Parliament, which is called Stortinget in Norwegian. The purpose to establish this fund is to transfer oil and natural gas resources into financial capital, and to prevent the devaluation of oil and natural gas due the future energy revolution, to ease the economic recession after the transition of the industry structure of the country and to solve the problem of aging society. The fund managers should also ensure an effective management of the petroleum capital and use the revenues of the Petroleum Fund on social welfare system. The legislation commenced since January 1st,1991 and received its first capital transfer of 1.981 billion Norwegian Kroner in 1996 (Norges Bank Investment Management., n.d.). In 2006 the fund was merged into the national pension fund and got its new name National Pension Fund Global. The fund’s market value rose to 7,012 billion kroner in the end of the first quarter of 2015 (Norges Bank Investment Management, 2015).

Proceeds of the National Petroleum Fund includes the central government net cash inflow from petroleum activities (the State’s Direct Financial Interest (SDFI), taxes , state-owned oil company stock dividends, etc.) and return on the Fund investment. Expenses include the annually transfer to the Ministry of Finance to compensate budget deficit of the non-oil sectors and the payment for the management cost of the fund. In 2001 the Storting declare that up to four percent of the fund’s revenue could be used in next year's government budget1996 (Norges Bank Investment Management., n.d.).

Norwegian Ministry of Finance is the discretionary manager of the National Petroleum Fund. In October 1997 the Ministry of Finance issued a National

Petroleum Fund Regulatory which made specific provision of the investment strategy and management structure of the fund (Norges Bank Investment Management., 2014). In the same year, the Ministry of Finance and Norges Bank formally signed entrusted management agreement of the National Petroleum Fund. The agreement clearly stipulates that the Ministry of Finance is the owner of the National Petroleum Fund

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who exercise the management right of the fund as the representative of the State. The Ministry of Finance is responsible to set target of investment return rate and establish risk control indicators. It is also responsible for the assessment of daily management of the organization and provides annual reports to Parliament.

Nevertheless, the daily management is authorized to the central bank. Norges Bank bears the responsibility to increase the value of the fund to make quarterly reports on its operation, risk control and costs, to be responsible directly to the Ministry of Finance. A clear division is that the Ministry of Finance is the owner and Norges Bank is the manager. In order to strengthen their responsibilities and

obligations, the agreement also includes that a quarterly press conference shall be called to report the operation to the public and get the supervision of the whole country. In addition, the central bank can use foreign brokers or foreign service providers to run the fund investment, by signing an agreement, and monitoring the business activities of foreign service providers (Norges Bank Investment

Management., 2014).

Central Bank divided the fund in several blocks through the Fund's risk

management mechanism and operated by the faithful merit private banks from Britain, Germany and other countries to increase the value of the fund.

To ensure the appreciation of the fund, investment strategy of the central bank is based on the principles of highly diversify and risk minimization. The fund only makes financial investment, invest in long position, but each has a small share (less than 1%). There are two Investment methods: one is the foreign stocks, and the other is the foreign bonds. Stocks and bonds accounted for respectively 40%, 60% in foreign investments. Investments in the Americas, Europe and Asia and Oceania markets accounted for 30%, 50% and 20% respectively. Currently, the government is only allowed to invest in 24 countries and regions which have developed and mature financial markets (Norges Bank Investment Management, 2015, p. 3 - 20). For example, in Asia, Japan, China Hong Kong, China Taiwan, while the National

Petroleum Fund managers are actively studying on the possibility of investing in Main Land China. At the end of the first quarter of 2015 the fund was invested with 62.5 percent in equities, 35.3 percent in fixed income and 2.3 percent in real estate (Norges Bank Investment Management, 2015).

Over the years, in order to maintain the stability of Norwegian economy and monetary, the National Petroleum Fund is only allowed to invest in the foreign

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markets. The operation of the fund is completely isolated with the Norwegian

domestic economy. Fluctuations in international oil prices and capital markets mainly reflected in the change of the fund size.

In December 31, 2003, value of the National Petroleum Fund was 845 billion Norwegian kroner, which equivalent to 54% of the GDP in Norway (Norwegian Petroleum Directorate, n.d.). A total of 104 billion Norwegian kroner was transferred from the Ministry of Finance to the Fund that year (Norges Bank Investment

Management., n.d.). To September 2004, as the market prices of petro increased continually, the Petroleum Fund exceeded 10,000 billion kronor a few months ahead of the plan. All these values are gain from only 29% of Norwegian petroleum

resources reserves Norway (Norwegian Petroleum Directorate, n.d.). This can also be used to infer the value of the remaining oil and natural gas reserves can be produced in Norwegian continental shelf.

The next several decades, oil and natural gas in the Norwegian continental shelf will development continually. International investment companies will also continue to gain significant returns for the National Petroleum Fund, the size of the Fund will continue to expand in the foreseeable future. The National Petroleum Fund will become an important economic safeguard of the healthy operation of the welfare system in Norway.

The Petroleum Fund has become an important factor in enhancing confidence of the Norwegian economy and stabilizing the domestic economic situation. The policy to establish the fund is praiseworthy by many countries.

The National Petroleum Fund are able to help Norway to limit the resource movement and spending effect since the Norwegian Government allocate the resource rent to the Fund entirely (Bye, Capplen, Eika, Gjelsvik, & Olsen, 1994). Therefore, the big chunk of the proceeds did not flow into the market or benefit the petroleum companies. Consequently, the huge oil and gas revenue did not cause remarkable increase of wage in the petroleum industry. As there is no increase of wage in petroleum industry, the phenomenon that labors of service and manufacturing

industry moves to petroleum sectors did not occur. This also prevent the loss of export competitiveness of Norway as the cost of manufacturing products. Meanwhile, 4 percent of the investment of the National Petroleum Fund are allowed to be withdraw to pay the government debt and raise the national welfare. In other words, the

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stronger purchase power and stimulate the development of non-petroleum sectors. Furthermore, the fund is not allowed to finance any specific future liabilities and restrictions are setting on large amount of withdrawals by the Norwegian parliament. Therefore, the National Petroleum Fund ensure the petroleum proceeds keeps away from Dutch Diseases and benefits the future generations in long-turn.

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4. Model

4.1 Labor force movement

Labor force movement from lagging sector and non-tradable sector to the booming sector is one of the criteria of Dutch Disease. The discovery of a large amount of natural resources leads to the increase of demand of labor force in petroleum sector. The excess demand causes the raise of wage in petroleum sector and attract labor force. Since Norway is a small open economy with its total productivity close to saturation before the discovery of natural resources, labor force can only move from other sectors.

4.2 Appreciation of real exchange rate and Model 1.

Norway is now the world’s seventh largest exporter of oil and second largest exporter of gas. Approximately 25 percent of Norway’s total production and 30 percent of state revenue are contributed by petroleum sector. Moreover, 98 percent of the country’s electrical energy come s from hydroelectric power, Norway export the majority part of its oil and gas production every year. The large amount of export brings a substantial export surplus, the supplement of foreign currency excess, therefore, the domestic currency faces pressure of appreciation. While the appreciation of domestic currency would worsen the export of non-resource tradable sector (manufacturing sector). Therefore, whether there is an appreciation of Norwegian Krone due to the booming of nature resource should be tested. In order to test the relation, the model as follow would be used.

𝐸𝐸𝑡𝑡= 𝛽𝛽0+ 𝛽𝛽1𝑡𝑡∗ 𝑄𝑄𝑡𝑡+ 𝜀𝜀𝑡𝑡

in which, real exchange rate =𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑒𝑒𝑒𝑒𝑒𝑒ℎ𝑁𝑁𝑁𝑁𝑎𝑎𝑒𝑒 𝑟𝑟𝑁𝑁𝑡𝑡𝑒𝑒 𝑁𝑁𝑜𝑜 𝑈𝑈𝑈𝑈𝑈𝑈 𝑡𝑡𝑁𝑁 𝑁𝑁𝑁𝑁𝑁𝑁

𝐶𝐶𝐶𝐶𝐶𝐶 𝑁𝑁𝑁𝑁 𝑁𝑁𝑁𝑁𝑟𝑟𝑁𝑁𝑁𝑁𝑁𝑁 ∗ CPI in US Hypothesis: 𝐻𝐻0: 𝛽𝛽1𝑡𝑡 = 0 𝐻𝐻1: 𝛽𝛽1𝑡𝑡 ≠ 0

E: Real Exchange Rate

Q: Export Revenue of the Petroleum Sector

This model is aimed to test whether the export revenue of petroleum sector have influence on real exchange rate. As was mentioned in section 2, the booming of resource sector would lead to an extension of export. Large amount of foreign currency inflow would lead to an appreciation of real exchange rate and then weaken the export competitiveness of other sectors. The National Petroleum Fund prevent these petroleum capital move into domestic market and keep the capital

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sustainable for future generation. Therefore, the coefficient of the revenue of Petroleum sector was expected to be close to zero.

4.3 Model 2.

𝜋𝜋𝑡𝑡= 𝛾𝛾0+ 𝛾𝛾1𝑄𝑄𝑡𝑡+ 𝛾𝛾2𝑉𝑉𝑡𝑡+ 𝛾𝛾3𝐸𝐸𝑡𝑡+ 𝜀𝜀𝑡𝑡

Hypothesis: 𝐻𝐻0: 𝛾𝛾1 = 0, 𝛾𝛾2 = 0, 𝛾𝛾3 = 0 𝐻𝐻1: 𝛾𝛾1 ≠ 0 𝑜𝑜𝑜𝑜 𝛾𝛾2 ≠ 0 𝑜𝑜𝑜𝑜 𝛾𝛾3 ≠ 0 𝜋𝜋𝑡𝑡: Inflation Rate

Q: Annual Export Revenue of Petroleum Sector

V: Proportion of Annual Increase of Market value of Government Pension Fund Global in GDP

E: Real exchange rate.

This model is going test if the National Petroleum Fund is sufficient to reduce the inflation and whether the energy boom has impact on the economy. Based on the resource movement effect and spending effects export revenue of the

petroleum sector is would have a positive relationship with inflation therefore the coefficient of the annual export revenue of oil and natural gas 𝛾𝛾1 is expected to be positive. As the National Petroleum Fund, 𝛾𝛾2, was aimed to help Norway to escape from Dutch Disease, the coefficient of the market value of the fund is expected to be negative which indicates that the National Petroleum Fund reduces the inflation. Moreover, the real exchange rate is expected to have positive

influence on inflation rate. A depreciation of home currency leads to an increase of export. As a result, foreign reserve increases in the home country. Central Bank have to issue more home currency. The increase of money supply and decrease of goods supply in domestic market lead to inflation. In another word, the coefficient 𝛾𝛾3 is expected to be positive.

In both model, I suppose that data are heteroskedastic. Therefore, robust regressions are used to test the models.

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5. Data

Figure 4. Export value from the petroleum sector and the export as share of total exports in Norway between 1971 and 2014

Figure 5 .Nominal and real exchange rate USD to NOK from 1990 to 2014 (Noreges Bank, 2015)

Figure 6. Nominal Inflation Rate of Norway from 1996 to 2014(World Inflation Data, n.d.)

Figure 7. Annual Increase of Fund Size in Proportion of GDP(World Inflation Data, n.d.)

. Figure 4 indicates the export value from the petroleum sector and the export as share of total exports in Norway between 1971 and 2014 in Billion Norwegian Krone. Data of Figure. 4 were provided by Norwegian Petroleum Directorate (2015). The research question of this paper indicates that the analysis in this thesis will look at the export data of the petroleum sector. Although the reason for looking at the whole petroleum sector has been outlined previously, there might be some doubt on why the export amount of the petroleum sector can represent the whole production of the petroleum sector. The reason is that despite of the oil and natural gas resources, Norway is also rich in hydropower resources. 98% of the domestic electric power are provided by hydropower. Therefore, almost all the production of oil and natural gas are export to the rest of the world. Moreover, the total revenue of petroleum sector is not given explicitly by the Statistical Bureau of Norway. Although the total revenue of

petroleum sector could be calculate as the product of total GDP and share of export in GDP, the result would include a large deviation. On the other side, according to the report of Norwegian Petroleum Directorate, the export value from the petroleum sector and the export as share of total exports in Norway from 1971 is able to be

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found directly. From the above, total export value is more accurate than revenue of petroleum sector

Figure 5, shows the Nominal Exchange Rate of USD to NOK and Real Exchange Rate which was adjusted the definition in Model 1. Data of Nominal Exchange Rate are able to be found from Norges Bank (2015). Real exchange rate has been discussed in Model 1 as one of criteria of the Dutch Disease. The real exchange rate depends on nominal exchange rate of US dollar to Norwegian Krone, Consumer Price Index of Norway and Consumer Price Index of the US. In this article, the annual exchange rate provided by the Central Bank of Norway (Norges Bank) is used as. On the other hand, data of Consumer Price Index (CPI) in Norway is only provided at the base year of 1998 according to the annual report of Statistic Bureau of Norway. Therefore, adjusted data of CPI in the US which is provided by the Central Bank of the US is used in this article. According to the chart, the trends of two exchange rates are similar, however, a time difference between Real Exchange Rate and Nominal Exchange Rate can be observed. As Real Exchange Rate reacts earlier than Nominal Exchange Rate in most cases, therefore, Real Exchange rate is the optimal option to measure Dutch Disease.

Figure 6 draws the Annual Nominal Inflation Rate of Norway. As data of Inflation Rate did not indicate whether it is Nominal or Real Inflation Rate. The percentage in change of CPI was used as Nominal Inflation Rate. Value of the National Petroleum Fund, Export value of the Petroleum sector and Real Exchange Rate are the

explanatory variables in Model 2. Export value of the Petroleum Sector and Nominal Exchange Rate has been discussed in previous paragraphs.

Figure 7. shows proportion of annual change of National Petroleum Fund in GDP form 1996 to 2014.The value of the National Petroleum Fund is the market value of the fund in the end of each year. The data of the fund size is included in the annual report of Norges Bank Investment Management (NBIM) and the value of the fund is measured in Billion Norwegian Krone (NOK). One thing worth to be mentioned is that the value of fund form 1990 to 1995 is not included since the petroleum revenue were used to pay for the government debts and the fund got the first capital inflow in 1996 Norway (Norwegian Petroleum Directorate, n.d.). The first six years were still included for the following reasons. As the petroleum proceeds were used on the debt

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payment only, it could be think as that the value of the fund was negative at the beginning. However there are no data of the value of the debt has been paid during that period and based on the export revenue of petroleum sector was less than 120 billion NOK which is less than 20% of the recent years. Therefore, Model 2 would only test data between 1996 and 2014. Moreover, the value of the fund and the annual change of the value of the fund trend to be upward. The log of annual change is also not possible for the reason that there are some negative value. Therefore, the

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6. Test result and analysis

6.1 Labor force movement

Figure 7.Employees in primary, secondary and tertiary industries (This is Norway 2014 What the figures say, 2014, p. 34)

Figure 4 indicates that there is not a movement of labor from service sector to manufacturing sector. Labor force moved smoothly from Primary and Secondary industries since 1950. However, this figure cannot show whether there is a

movement of labor between the booming sector (petroleum sector) and the lagging sector. There is another thing worth to be mentioned is that petroleum sector in Norway is also an high technology industry since the oil and natural gas reserves are hidden at the bottom of the sea. Compared with the Middle East countries whose oil resources are in the continental shelf, the difficulty of exploration and exploitation is very high. As the exploitation of the petroleum resources is highly dependent on high technologies, this would also increase the wage and number of employees in the High-tech industry which is part of the tertiary industry. In summary, there is no sufficient evidence indicates that the booming of the oil and natural gas has led to a movement of labor from lagging sectors to the booming sector.

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6.2 Model. 1.

Theoretically, it was expected to have no relationship between Revenue of Petroleum Sector and Real Exchange Rate, since the booming of export would increase the inflow of foreign currency. This relationship is validated empirically, given the coefficient for export revenue of petroleum sector is estimated to be -.0012484. This relationship is significant with a p-value of 0.023. This indicates that the large amount of oil and nature gas export did not increase the real

exchange rate. With this result, the National Petroleum Fund seemed to be helpful to relieve resource movement effect and spending effect. Another reason might be that Norway is a small country which is lacking of nature resources despite of oil, natural gas and wooden. The manufacturing industry is not prosperous. Therefore, Norwegian used half of the export revenue to import goods which are cheaper to purchase than manufacture by themselves. Especially form Sweden, Germany, Demark and China. Moreover, Norwegian government saved the majority of these revenue in to the National Petroleum Fund, so that the capital inflow does not going to the domestic market.

6.3 Model.2.

The t-value of 𝛾𝛾1 is 0.52 and the p-value is 0.622. While the coefficient for fund size is 0.0019454. This indicates that it is significant that the increase of the fund value has no effect on inflation. In other words, the National Petroleum fund did help to reduce the inflation in Norway. The Value of Export of Oil and Nature Gas Sector has a similar situation as the Fund Size. With a coefficient of 0.0008244, export revenue has a limited negative relationship with inflation. The p-value of 𝛾𝛾2 is 0.726 which indicates that there is no significant relationship between export revenue of petroleum sector and inflation. What is unexpected is that there is significant evidence indicates the influence of nominal exchange rate on inflation as the p-value is smaller than 0.05 and the coefficient is 0.4707746. The

coefficients are not equal to zero as expected might because that this model did not include other factors that has impact on Dutch Disease such as wage and tax. As the wage level increased in the whole country due to the development of welfare system, it is difficult to infer that the booming of oil and natural gas reserve had increase the risk of Dutch Disease by increase the wage level.

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7. Conclusion

The discovery of oil and natural gas fields helped country get a large amount of stable cash inflow every year and helped the county become one of the world richest country. The National Petroleum Fund is established by the Norwegian Parliament in 1990 to avoid Dutch Disease and ensure the government are able to provide capital for future generations to maintain a high welfare society. The test on Real Exchange rate and Export Revenue of Petroleum Sector indicates that the Export Revenue of Oil and Natural Gas does not increase the Real Exchange rate. While the test of the relationship between Inflation, Annual Increase of Fund value, Export value and Real Exchange rate shows the inflation has positive relationship with the Real Exchange rate and no relationship with the rest two. Therefore, we can conclude that with the help of the Norwegian Petroleum Fund the country is still influenced by the Dutch Disease.

There are also some limitations of this study. For example, the Norwegian Parliament approved legislation decision to establish the National Petroleum Fund in 1990. However, the Petroleum Fund began to receive assets form the Ministry of Finance allocated until 1996 when the government had a budget surplus. This lead to a bias of the estimation of the linear regression model since no data is available for the first 6 years and reduce the sample number.

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Norges Bank Investment Management. (2015, May 12). Market value. Retrieved May 20, 2015, from http://www.nbim.no/en/the-fund/market-value/

Norges Bank. (2015, June 5). EXCHANGE RATE FOR US DOLLAR. Retrieved June 12, 2015, from http://www.norges-bank.no/en/Statistics/exchange_rates/currency/USD/) Norwegian Petroleum Directorate. (2015, March 1). Makroøkonomiske indikatorer for

petroleumssektoren, 1971-2014. Retrieved from http://www.norskpetroleum.no/wp-content/uploads/29_Makroøkonomiske-indikatorer-1971-2014_graf_01032015.xlsx Norwegian Petroleum Directorate. (2015, March 16). Exports of oil and gas - Norwegian

Petroleum. Retrieved June 20, 2015, from

http://www.norskpetroleum.no/en/economy/exports-norwegian-oil-and-gas/

Norwegian Petroleum Directorate. (n.d.). The government's revenues - Norwegian Petroleum. Retrieved January 5, 2015, from

http://www.norskpetroleum.no/en/economy/governments-revenues/

This is Norway 2014 What the figures say. (2014). Retrieved from Statistics Norway website:

http://www.ssb.no/en/befolkning/artikler-og-publikasjoner/_attachment/195077?_ts=1483baee618

United States Energy Information Administration. (n.d.). Norway Crude Oil Production by Year (Thousand Barrels per Day). Retrieved April 3, 2015, from

http://www.indexmundi.com/energy.aspx?country=no&product=oil&graph=producti on

World Inflation Data. (n.d.). Inflation Norway. Retrieved July 10, 2015, from

(www.inflation.eu/inflation-rates/norway/historic-inflation/cpi-inflation-norway-2008.aspx)

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Appendix

Appendix 1. Consumer Price Index

Sources: Statistic Norway

(http://www.ssb.no/en/priser-og-prisindekser/statistikker/kpi/maaned/2015-01-09) Bureau of Labor Statistics

(http://www.bls.gov/data/inflation_calculator.htm)

Year CPI Nor 1998 base CPI US 1982-1984 base

1970 17,9 24,4 1971 19,1 25,5 1972 20,4 26,4 1973 22 28,0 1974 24 31,1 1975 26,8 33,9 1976 29,3 35,8 1977 32 38,1 1978 34,6 41,1 1979 36,2 45,8 1980 40,2 51,9 1981 45,6 57,2 1982 50,8 60,7 1983 55,1 62,5 1984 58,6 64,7 1985 61,9 66,9 1986 66,3 68,0 1987 72,1 70,4 1988 76,9 73,3 1989 80,4 76,8 1990 83,7 80,8 1991 86,6 84,1 1992 88,6 86,5 1993 90,6 89,0 1994 91,9 91,2 1995 94,2 93,8 1996 95,3 96,5 1997 97,8 98,7 1998 100 100,0 1999 102,3 102,2 2000 105,5 105,8 2001 108,7 108,6 2002 110,1 110,1 2003 112,8 112,6 2004 113,3 115,5 2005 115,1 119,6 2006 117,7 123,4 2007 118,6 127,0 2008 123,1 132,2 2009 125,7 131,3 2010 128,8 134,0 2011 130,4 138,7 2012 131,4 141,7 2013 134,2 143,6 2014 136,9 145,8

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Appendix 2. Nominal Exchange rate USD/NOK

Sources: Norges Bank

(http://www.norges-bank.no/en/Statistics/exchange_rates/currency/USD/) Year Nom Ex USD/NOK

1970 7,15 1971 7,04 1972 6,59 1973 5,74 1974 5,52 1975 5,22 1976 5,46 1977 5,32 1978 5,24 1979 5,06 1980 4,94 1981 5,73 1982 6,45 1983 7,30 1984 8,16 1985 8,59 1986 7,39 1987 6,74 1988 6,52 1989 6,90 1990 6,26 1991 6,48 1992 6,21 1993 7,09 1994 7,06 1995 6,34 1996 6,46 1997 7,07 1998 7,55 1999 7,80 2000 8,80 2001 8,99 2002 7,99 2003 7,08 2004 6,74 2005 6,44 2006 6,42 2007 5,86 2008 5,65 2009 6,29 2010 6,04 2011 5,61 2012 5,82 2013 5,88 2014 6,26

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Appendix 3. Annual Inflation rate in Norway

Resource: World Inflation Data

(http://www.inflation.eu/inflation-rates/norway/historic-inflation/cpi-inflation-norway-2008.aspx) Inflation 1990 4,15% 1991 2,34% 1992 2,52% 1993 1,34% 1994 2,65% 1995 1,07% 1996 3,08% 1997 1,96% 1998 2,33% 1999 2,87% 2000 3,36% 2001 1,30% 2002 5,05% 2003 -1,83% 2004 1,07% 2005 1,76% 2006 1,21% 2007 2,23% 2008 3,68% 2009 2,50% 2010 2,05% 2011 0,54% 2012 1,30% 2013 2,27% 2014 2,00%

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Appendix 4. Market Value of National Petroleum Fund in Norway Fund Size 1990 0 1991 0 1992 0 1993 0 1994 0 1995 0 1996 46 1997 113 1998 172 1999 222,4 2000 386,6 2001 619,3 2002 604,6 2003 847,1 2004 1011,5 2005 1390,1 2006 1782,8 2007 2018,5 2008 2279,6 2009 2642 2010 3080,9 2011 3307,9 2012 3824,5 2013 5032,4 2014 6430,6 Resource: NBID (http://www.nbim.no/globalassets/reports/2000_1999_-1998/1999-annual-report-eng.pdf)

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Appendix 5. Export Revenue of Petroleum Sector – Norway

Resource: Norwegian Petroleum Directorate

(http://www.norskpetroleum.no/en/economy/exports-norwegian-oil-and-gas/) Export Val 1990 93 1991 101 1992 102 1993 109 1994 114 1995 122 1996 168 1997 179 1998 130 1999 174 2000 328 2001 323 2002 284 2003 291 2004 348 2005 440 2006 512 2007 491 2008 635 2009 454 2010 484 2011 578 2012 621 2013 581 2014 550

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Appendix 7. Regression on Model 2. _cons -1.801462 1.575064 -1.14 0.271 -5.158633 1.555708 Er .4707746 .1695755 2.78 0.014 .109333 .8322162 ExportValue .0008244 .0023126 0.36 0.726 -.0041049 .0057537 DFSGDP .0019454 .0038697 0.50 0.622 -.0063027 .0101935 NominalInf~n Coef. Std. Err. t P>|t| [95% Conf. Interval] Robust Root MSE = .87413 R-squared = 0.1831 Prob > F = 0.0330 F( 3, 15) = 3.80 Linear regression Number of obs = 19 . reg Nomi nalInflation DFSGDP ExportValue Er, robust

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