Norway is a country of just over 5 million inhabitants, with living, development and well-being conditions that are among the best in the world. And, of course, with a prosperous economy, which puts it among the richest countries, using almost any index we can think of. They are the state everyone dreams of being.
But it was not always like this. When Norway became independent from Denmark, in 1814, it was a rural country, with 90% of the population dedicated to agriculture, on land that was also not particularly easy to cultivate. It was not until the end of the 19th century that the country’s economy began to take off, thanks to the industrial revolution, agricultural improvements, the expansion of livestock… and, above all, the control of the sea. They became a maritime transport power, which allowed them to export iron, coal, wood and fish, and had a naval fleet that came to represent 7% of the world total.
However, World War I, despite the fact that they remained neutral, caused the absolute stagnation of their economy, mainly due to their dependence on the United Kingdomat that time its main trading partner.
Norway was always seen as the poor cousin of the Scandinavian countries. A few ‘hillbillies’, farmers and fishermen, whom Sweden and Denmark, much more urban, always looked down on. With the economy stopped, and without opportunities, hundreds of thousands of Norwegians emigrated to North America in the first half of the 20th century, both to the United States and Canada. In fact, after Ireland, it was the country in Europe with the most emigrants in proportion to its population.
As if the situation weren’t complicated enough, World War II and the German occupation ended any signs of recovery that the Norwegian economy might show.
After the war, Norway faces the challenge of resuscitating its battered, archaic economy closely linked to fishing. With a future that they did not see at all clear, the Labor Government, with Einar Gerhardsen at the helm, initiates a series of social democratic reforms and with a clearly Keynesian approach. The objective, to reduce poverty, was to improve the redistribution of wealth.
The social democratic path
The recipe applied by the Executive went through implementing high and progressive taxes, creating a kind of VAT and also additionally taxing discretionary products such as alcohol, tobacco, cars or cosmetics.
The income that the State achieves in this way allows it to develop a Social Security system, which guarantees pensions and also allows coverage of medical care for the entire population, among other benefits.
Norway’s situation is finally improving, and many emigrants even return, but that still does not make it a rich country. That leap occurs in the 1960s. The country’s experts did not even believe that there could be hydrocarbons under its sea. But at the beginning of that decade, the Netherlands found gas on its coasts, which prompted research into the rest of the North Sea. Private companies are the first to approach the Government to request permission to carry out this exploration, but the Executive, prudent, first develops the appropriate legal framework.
Furthermore, in 1963, Norway negotiates with the United Kingdom and Denmark the distribution of the maritime subsoil of the North Sea, achieving a profitable agreement, which gave it more ground than it would have if they had applied the Geneva Convention. He benefited from the UK’s rush to start exploring, and the Danish foreign minister’s negotiating inability.
They find oil on their shores
With the regulations developed and the territorial limits clear, the exploration begins. The companies in charge, at that time all foreigners, find several oil reserves, but small in size and difficult to exploit. It is in 1969 when the fever breaks out. Philips Petroleum Company finds a large deposit in the Ekofish field, also shallow and with kinder climatic conditions than in the rest of the region, which facilitated extraction.
It is at that moment that the authorities begin to believe in the importance of the oil sector, and in the importance of investing in this field. In 1973 he founded Statoil, the state oil company. However, the net benefits were not automatic: the large capital investment required to develop the oil industry delayed profits until the 1980s.
The oil industry changed Norway’s economy quickly. In 1975 it was already one of the main sources of employment in the country, which managed to practically end unemployment. The difficulties in the North Sea, both to explore and to drill, prompted the reconversion of numerous technology and construction companies, which took advantage of their experience to grow in the heat of the fever for black gold.
Despite everything, the authorities do not go crazy. First reinvest oil profits to stimulate the economy and in improving the quality of life of its citizens. When the price of oil skyrockets in the 1980s is when they decide to start saving part of the profits that crude oil gave them. And they do not lose perspective when the fall in the price of oil in 1986 drags down the national economy.
The Norwegian Sovereign Wealth Fund
Going one step further, in the 1990s he created the Government Pension Fund Global, a sovereign wealth fund, today the largest in the world, with which the Government invests oil revenues in stocks, bonds and real estate to diversify the country’s wealth. . This is the recipe that he applies to avoid ‘Dutch disease’. This is known as the ‘disease’ that can sink the economy of a country due to the appreciation of its currency. When it begins to export a raw material on a massive scale, the influx of capital appreciates the currency, which erodes the competitiveness of other sectors, which are forced to stop exporting. The Netherlands was the protagonist of this evil when, as we had commented, it found large natural gas reserves in the 1960s.
Norway quickly converted much of its crude revenue into foreign currency, mitigating this effect. The fund also allows you to mitigate the consequences of economic crises, as was seen even in the pandemic.
The authorities have never lost focus, regardless of the color of the party in government. Despite the different falls in the price of oil that have been experienced in recent decades, they have not neglected their sovereign wealth fund. In addition, no Executive has fallen into populist measures that could be carried out with the huge amounts of capital available, and despite the fact that a part of the population claims to save less and spend more. They have always thought in the long term, and in trying to guarantee the well-being of the next generations.
Today, Norway has a strong and prosperous economy. Oil still represents 20% of its GDP, and it expects to achieve record revenues next year, of more than 130,000 million euros, due to the increase in prices caused by the invasion of Ukraine and the sanctions on Russia.
He will allocate a quarter to the budgets, and the rest will go to his pension fund, the largest in the world, and which has a capital of more than 1.3 trillion dollars.
These are the pillars on which the Norwegian economy is based and which explain how it has become a rich country. And how it faces demographic change and problems such as future pension payments with less fear, as happens in many other European countries.