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Chart 27: The launch of government industrial policies in the 1980s helped Malaysia diversify
[Chart showing Manufacturing value-added (% of GDP) and Manufactured exports (% of merchandise exports, rhs) from 1960 to 2014]
Source: Haver, BofA Merrill Lynch Global Research

Norway case study suggests institutions are paramount
While it is perilous to extend lessons that could overemphasize idiosyncracies, the case of Norway highlights, if anything, the importance of sound institutions and macro management when it comes to broader economic diversification. The case of Norway has relevance for the Gulf Cooperation Council countries (GCC), including Saudi Arabia, especially since oil discovery (late 1960s) and oil production (1970s) timelines were not that sensibly different from the GCC.

That being said, outcomes were widely different as well as the starting point since Norway was already a developed country with mature social, economic and political institutions at the time of the discovery of oil. This allowed a distinction between the management and ownership of natural resources uncommon in the GCC and several other resource-based economies, in our view.

Four ways in which the supply-side matters for economic diversification
We believe that there are four lessons to learn from Norway’s outperformance:

1) The importance of human capital
Norway’s priorities from early on were to build human capacity, investing in education, increasing labor force participation and supporting productivity growth.

2) Prudent conduct of fiscal policy
Current Norwegian oil revenue management puts considerable emphasis on stabilizing the economy and facilitating a gradual phase-in of oil revenues over time (which crowds out trophy projects and put onus on achieving productivity gains in the non-oil sector). Following the 1970-80s boom-bust sequence and expansion of the welfare state, Norway established in 1991 a Government Petroleum Fund to receive and invest oil revenue (it received its first net transfer in 1996). The fiscal rule adopted in 2001 targets a central government structural non-oil budget deficit equal to 4% of GPF assets (the latter assumed to be its estimated long-run real rate of return). That being said, Saudi Arabia’s infrastructure requirements could have prevented adapting this part of Norway’s model for long, in our view.

3) Institutional experience
Norway’s development has been characterized by continuous development and integration of resource-based export-oriented industries, some of which were active since 1950. While Norway is the world’s third largest exporter of natural gas and the sixth largest of crude oil, it is also the second largest exporter of seafood, possesses the fourth largest shipping fleet, is the sixth largest exporter of aluminium and the first exporter of sub-sea technology products and services.

32 GEMs Paper #26 | 30 June 2016
Merrill Lynch
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