1. A small nation of about five million people nestled in the northwest corner of Europe.
2. Historically, Norway was the poor cousin of Sweden and Denmark, but is no longer.
3. Either in this year or next, Norway's sovereign wealth fund will crest a trillion dollars.
4. Eighteen years ago the sovereign wealth fund sat at a mere $200 million.
1. A small province of about four million people nestled in western Canada.
2. Historically, Alberta was the poor cousin of Ontario, but is no longer.
3. Alberta's Heritage Fund is stuck at $17 billion.
4. In 1976 sat at approximately $620 million.
The comparison is not exactly flattering. In half the time, and with less than one-third the starting capital, Norway has created more than 50 times the value for its citizens. Norwegians are rolling in cash and Albertans are not. Alberta's economy is on the precipice of free-fall where Norwegians are able to look over the precipice and know that they are not going over it.
How did this happen? The simple answer is that Norway decided to de-link its economy from oil revenues and Canada did not.
In retrospect, it looks like a pretty smart decision. While Norwegians can be said to be pretty smart, they have not always been so smart. In fact, they got burned twice monetarily between 1970 and 1996. Their petro-Kroner sunk the rest of the economy and created unsustainable conditions. They finally got it right in 1996, when they took the revenues out of the government's hands and put them into a sovereign wealth fund with real independence.
The "free money" of resource revenues is almost too much for any politician. If you are a right-wing politician, you promise tax breaks, which will "cost nothing." If you are on the left, you promise programs, which will also "cost nothing."
Alberta, being very much inclined to the right, chose tax breaks -- the most significant being zero consumption tax.
This sounds good and covers a lot of short-term electoral promises, but when the golden goose of resource revenues doesn't lay an egg, short-term gain becomes long-term pain. Beware of promises that "cost nothing." One day and in one way or another, you pay for them.
The consequences of buying into the illusion of getting "something for nothing" can be devastating. Alberta will run a deficit this year. Housing prices will plummet. Unemployment will surely rise, and if the slide in oil prices goes on for a long time, Alberta will quickly go from being a "have" province to a "have-not."
This might have been fine if Alberta were a discrete economy, separate from those of us that are not so "blessed" or depending on how you look at it, "cursed" by such an abundance of natural resource revenues. However, when a disproportionate share of economic activity gravitates to one province, it necessarily gravitates away from others. Governments like Ontario have been complaining for years that a 110-cent (USD) dollar makes its industries uncompetitive. Now that the Canadian petro-dollar is closer to 85 cents (USD), Ontario, in particular, is much more competitive.
No one would begrudge Alberta's right to make its politically sovereign choices, but the economic consequences for the rest of Canada are difficult to say the least. A federal government that was actually working in the interests of all its citizens would have fashioned a series of policies and buffers, which would have taken the sting out of the inequities.
Norway, for instance, decided in 1996 to take its resource revenues and segregate them from the government and the economy. As a consequence, political promises are much more realistic -- they have to be costed in real terms -- and other industries in the rest of the country remain competitive. Norway is not just a one-trick pony. It has a prosperous diversified economy. Just like other currencies perceived to be resource-based, the Kroner is under immense pressure. The key difference is that they have a trillion-dollar cushion.
Norway's mainland economy has been partially insulated from global financial turbulence and oil price volatility, reflecting the well-functioning fiscal framework governing oil revenues. The economy is projected to retain its momentum despite lower oil prices and falling investment by the oil industry in the near-term. Household demand will remain solid with steady employment gains and rising household net worth. Non-oil exports and business investment will firm as the global economy improves.
(OECD economic forecast summary for Norway, November 2014)
Political choices matter. No one knows the price of oil in the next month, the next year, or the next decade. The only certainty is uncertainty. Woe betides the poor finance minister who bases revenue projections on resource royalties. Or, as the recent Brian Lee Crowley piece in the Globe and Mail quoted former Alberta treasurer Jim Dinning: "Non-renewable natural resource revenues are non-reliable revenues." I wonder when the economic pain will exceed the political gain and Alberta will de-link its resource revenues from its economy? Let's hope that it is sooner rather than later, for our collective sake.
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