, reforms prove to be very profitable even though they are painful in the short run. among the changes in the norwegian economy from the 1990s on were the removal of subsidies, closing down of government - owned enterprises, deregulation in important markets like housing and electricity, tax reform which increased incentives to work and closed tax evasion loopholes, and the reform of parliamentary budget procedures. finally, a fiscal rule was put in place, providing a sustainable relationship between the government pension fund and the government budget. the fiscal rule states that the government every year shall use the estimated long term real return on the fund, set at 4 per cent. however, there is no direct link between petroleum revenues and the fund. the government collects taxes from the whole economy, including the petroleum sector. after all government expenditures are paid, the surplus is transferred to the fund. the last 10 years, fiscal policy has been geared towards a cyclically adjusted non - oil deficit which corresponds to 4 per cent of the fund every year. let me now turn to one very specific norwegian issue : the management of our oil fund, called the government pension fund global. for the last 20 years, norway has been a major petroleum producer. at the maximum, our nation produced about 4 per cent of global petroleum. this geological luck has given the norwegian state an overwhelming cash flow. the first money was transferred to the fund in 1996. fifteen years later the fund stands at nok 3. 2 trillion, or eur 410 billion. it is probably the second largest sovereign wealth fund in the world. the fund is now 120 per cent of norway ’ s gdp. norges bank, as manager of this financial wealth, has laid down several governing principles for the fund. we seek no controlling stakes. in fact, the maximum ownership in any one company is 10 per cent. we seek as good a return as possible, given the moderate level of risk defined by the norwegian parliament and the ministry of finance. although government - owned, the fund has no role at all in norwegian foreign policy. the fund is managed within an ethical framework. this framework has two pillars. some companies are excluded from the investment universe, by the ministry of finance. and norges bank has a corporate governance department which works together with the companies we invest in. the overall principle for the investment strategy of the fund is to keep a medium risk profile, defined by the parliament and ministry. norges bank makes investment decisions within this bis central bankers ’ speeches risk profile,

prices were high. in recent years these countries as a group have actually been in deficit, while norway has had a small surplus, barely visible in the graph. how much should oil producers save? exactly how much producers of non - renewable resources should save is a more complicated question. one potential yardstick is that savings should be sufficient to avoid the so - called “ dutch disease ”. the phrase was originally coined to describe the strong decline of the manufacturing sector in the netherlands following the exploitation of natural gas resources in the 1960s and 1970s. the classic paper by corden and neary ( 1982 ) 3 describes the key mechanisms behind this development. they describe two effects in an economy experiencing a boom in an extractive industry, like oil or natural gas. the first effect is the spending effect. an oil discovery will increase export revenues, allowing higher imports over time. normally, demand for non - tradable goods will also increase. the nontradable goods sector will require more domestic resources. 2 / 6 bis central bankers'speeches graph : labour market in a three - sector model as a result of higher labour demand from the non - tradable sector, the general wage level will increase, and the non - tradeable sector will expand at the expense of the two tradable sectors. graph : “ spending effect ” but this is only half of the story. the second part is the resource movement effect. also the oil related - sector will demand more labour. as a result, wages will move up further, and the manufacturing sector will shrink even more. graph : “ resource movement effect ” this crowding - out of manufacturing is unavoidable if the benefits of the oil resources are to be enjoyed. but the process may go too far. the economy may find itself in a difficult situation when resources are exhausted. the structural changes in the economy have to be reversed. workers who become unemployed must find new jobs in manufacturing. this could be quite challenging. it is at this stage you can really assess whether a resource economy has escaped the “ dutch disease ” or not. gagnon ( 2018 ) argues that the necessary adjustment costs will be minimised if spending follows the permanent income principle, i. e. the expected real return of the resource wealth should be spent every year. on this background he claims that norway has saved too much and that spending should rather have been based on a modified version of the permanent income principle. reasons for high saving in norway the norwegian fiscal rule implies a